How Does FEGLI Work?
The Federal Employee Group Life Insurance (FEGLI) policy falls in a category called “Group Term.” Group Term is a life insurance policy offered by employers to their employees. You are covered for a set amount of coverage usually related to your salary, for as long as you work and continue to pay your premium in retirement. To be eligible for the FEGLI program all you have to do is work for the Federal Government. Health is not an issue at all if you sign up when you first start employment. This makes it very attractive to those people with existing health problems.
If you want to take a deeper dive to learn more about what FEGLI is.
When you begin working for the Federal Government, you are automatically enrolled in the program. The plan that you get automatically is the “Basic” Plan which covers your salary plus 2 thousand dollars. The federal government partially pays for a portion of this. If you work for the Postal service, your Basic is completely free. The Basic plan also offers double the coverage for employees under the age of 35 with no additional cost. “Option A” is an option to add $10,000 of insurance. “Option B” allows you to add a multiple of your salary to the insurance amount, up to five times.
Option B has very different pricing than the other options. Pricing is based on your current age and adjusts every five years. This 5-year adjustment is for ages ending in 5 and 0. This can get very costly the older you become as the premiums jump significantly doing your 50’s. An example of this is
Mary Age 50 making $100,000 a year
At 50 pays $55 a pay
At 55 pays $100 a pay
At age 60 pays $220 a pay
Option C is the part of the plan that provides protection for your spouse and children. The protection is in multiples of $5,000 and $2,500. The spouse multiples are for $5,000 and the children $2,500. You can get up to 5x for each multiple.
You can increase FEGLI options during certain life events (Marriage, Childbirth, Adoption, etc.) as well as open enrollments. Open enrollments, however, are very rare and this should not be something that an employee waits for. In fact, one just passed in 2016. So the next one is likely far off.
The way to be proactive in this regard is to consult with a professional to see what your options are outside the government employee coverage. You can enroll in a private plan at any time no matter the life circumstances.
An Outside Term policy can be better than your Life Insurance Policy through your job if you have good health and a vision of how you want to leave your life insurance. For example, you’re a 45 years old who just picked up Life Insurance through your job, your term life insurance is going to be increasing every five years for the rest of your life in most cases. Whereas if you have your personal policy, that policy will be fixed for 10 years, 15 years; 20 years or 30 years. You won’t have to worry about the price fluctuation; you have one set price for the rest of the term of that policy. So, in that case, it makes it easier to plan when you have your Individual Policy, plus you can get a plan priced on your health instead of the overall group. This works if you’re healthy, it does not work if you’re unhealthy. So, you just have to consult your Financial Adviser or Life Insurance Agent to see which works best for you. But, Typically an Outside Policy works better for you because you can manage the cost easier.
While working at a bank in the summer of 2006 I got to see first hand what a person with newly inherited money without proper education can do with money. My first week on the job there was a woman for the purpose of this writing we can call her “Mrs. Pam” she came into the branch made a deposit and I saw she had well over $200,000 in her checking account. I had no clue how this woman got this money I just knew something seemed off. She didn’t carry herself like someone that earned the type of income that could amass this much money in a checking account. As the weeks went on I saw Mrs. Pam come into the branch almost every other day making some type of withdrawal or ordering some type of Official Check. Her money dwindled by the day.
One day Mrs. Pam came in with her children and they sat and ordered 5 separate official checks for huge sums. They were planning a family reunion that was going to be funded totally by Mrs. Pam. This reunion ended up costing Mrs. Pam well over $60,000. Her funds were pretty much gone. I remember coming into the branch one day and saw her account at $17,000 I almost panicked. I then went deeper into her account and saw that before I started at the branch Mrs. Pam’s average monthly Non-Sufficient Funds was at 3 per month. She was heading right back to ground zero. I then asked a coworker what happened and the person said Mrs. Pam’s mother left her the money. This came as no surprise to me as it all made perfect sense now.
Needless to say in the next two months Mrs. Pam was right back at her negative balance habits and it got so bad she had to close the account because she didn’t have enough to cover her last NSF fee buildup. I could see the lack of control Mrs. Pam had the lack of awareness on what to properly do with the money. At the time I didn’t have the education but now I see her mistakes and empathize with her for doing what she thought was best.
Education and holding each other accountable with that education is key. Had Mrs. Pam’s Mother told her “Pam I want to make sure you get this, I want you to study financial literacy and come up with a plan for what you will do with your inheritance” This story would have been totally different. The only thing missing from Mrs. Pam story is a conversation and an education. An inheritance without a solid conversation is a setup for disaster.
The purposes of Life Insurance through your job is for an employer to be able to offer its employee’s life insurance coverage. Some people get it mixed up thinking it will last for their entire life, but it does not. This policy will only last you as long as you work for the organization that you work for and the cost of it will go up over the time you are there. Most Life Insurance policies through your job stay the same from age 18-40, and once you reach the age 40, it goes up every five years. However, when you get to age 65-75, it gets astronomical to the point where you’re forced to drop it. In most cases like for the Federal Government for example after the age of 65 not all the coverage goes away just 75% goes away. This is not a problem if you are working the job or you die while you are working it ends up being a good thing, the issue arises when you think this is all the coverage you have, and it will last for the rest of your life. On average more than 95% of people die in retirement and not during their working years. So, while Life Insurance through your job is cool, it’s always good to get other insurance coverage outside of it.
Life Insurance Policies are not paid for with before-tax dollars. The reason for this is when your beneficiaries can get the check for your Life Insurance that money is already taxed and they don’t have to pay taxes on that money. So, if you have a $100,000 Life Death Benefit and you pass and your heirs are given that check there are no taxes due. However, if you were to pay for the premiums with pre-tax dollars, taxes would have to be paid, so Life Insurance companies don’t bother with that, they only do post-tax dollars. .