Key Takeaways:

• Federal employees have multiple options when it comes to life insurance, but understanding the intricacies of the Federal Employees’ Group Life Insurance (FEGLI) program is essential for making informed decisions.
• Choosing whether to keep, drop, or replace your FEGLI policy involves evaluating your coverage needs, personal finances, and available alternatives.

The FEGLI Dilemma: Keep It, Drop It, or Replace It? Here’s What You Need to Know

Federal employees have a benefit that many in the private sector envy — access to the Federal Employees’ Group Life Insurance (FEGLI) program. Established in 1954, FEGLI provides group life insurance coverage to federal employees, retirees, and their families. While it’s convenient to enroll in FEGLI when starting a federal career, employees often reach a point where they wonder if continuing with FEGLI is the best financial decision. As 2024 unfolds, it’s crucial to reassess whether to keep, drop, or replace FEGLI coverage, given the program’s rising premiums and evolving personal insurance needs.

Let’s dive into what you need to consider in this decision-making process.

What Is FEGLI and How Does It Work?

FEGLI is a group term life insurance plan designed specifically for federal employees. The coverage includes four main options:

1. Basic Coverage: Automatically covers your salary rounded up to the nearest thousand, plus $2,000. The federal government subsidizes a portion of the premium for basic coverage.

2. Option A – Standard Optional Insurance: Provides an additional $10,000 of coverage.

3. Option B – Additional Optional Insurance: Allows you to purchase extra coverage in multiples of one to five times your annual salary.

4. Option C – Family Optional Insurance: Covers your spouse and dependent children for a predetermined amount.

The premiums for FEGLI are deducted directly from your paycheck, and the program provides an easy way to secure life insurance without the need for medical exams.

However, FEGLI is term insurance, which means it has no cash value or investment component, and premiums increase with age. This reality often leads federal employees to reevaluate whether FEGLI is still the best option as they approach retirement or experience life changes.

The Case for Keeping FEGLI

FEGLI offers several advantages, particularly in the early years of employment. Here’s why some federal employees choose to keep their coverage:

1. Easy Enrollment and No Medical Underwriting

One of the key benefits of FEGLI is its automatic enrollment and lack of medical underwriting for basic coverage. If you have pre-existing conditions or struggle to obtain life insurance elsewhere, keeping FEGLI might be your best bet for affordable coverage.

2. Affordable Early Premiums

For younger employees, FEGLI’s premiums can be very affordable, especially for the basic option, which is partially subsidized by the government. If you are relatively young and healthy, maintaining your FEGLI policy can offer significant financial protection without breaking the bank.

3. Guaranteed Coverage for Family

FEGLI’s Option C offers coverage for family members, including spouses and dependent children, without requiring individual policies for each person. If insuring your entire family is a priority, this feature can simplify your insurance portfolio.

4. Convenience

With premiums deducted directly from your paycheck, you don’t need to worry about missed payments or dealing with multiple insurance companies. The convenience of FEGLI often outweighs the drawbacks for many federal employees, especially those who are busy managing their careers.

When Dropping FEGLI Makes Sense

As you age, the appeal of FEGLI may begin to wane due to rising costs. The program’s structure is designed such that premiums increase every five years after age 35, making it more expensive as you approach retirement. Here are some reasons you might consider dropping your FEGLI coverage:

1. Increasing Premiums

While FEGLI starts off affordably, premiums for optional coverage (especially Option B) skyrocket with age. For instance, once you reach your 50s or 60s, the costs can become prohibitive, forcing many employees to rethink their insurance needs. This is especially true for retirees who continue to pay for coverage out of pocket without the subsidy provided during their working years.

2. Lack of Cash Value

Since FEGLI is a term life insurance policy, it doesn’t build any cash value over time. If you’re looking for an insurance plan that also serves as an investment vehicle, you may find more suitable options outside of FEGLI.

3. Alternative Insurance Options

With a healthy competitive insurance market, you may be able to find individual policies that provide better coverage at a lower cost than FEGLI. Whether you’re looking for term or permanent life insurance, many private insurers offer plans tailored to different life stages and needs.

Should You Replace FEGLI?

For some federal employees, dropping FEGLI isn’t the end of their life insurance journey. Replacing FEGLI with an alternative policy is a common strategy to ensure continued coverage while avoiding escalating premiums.

1. Explore Individual Life Insurance Policies

Private life insurance policies often provide more flexibility and potential savings compared to FEGLI, particularly if you’re in good health. Individual policies can be customized based on your desired coverage amount, policy duration, and even premium structure. Term life insurance outside of FEGLI typically offers a fixed premium for a predetermined period, providing predictability as you plan for the future.

2. Permanent Life Insurance for Long-Term Needs

If you’re concerned about lifelong coverage, you might want to consider a permanent life insurance policy, such as whole life or universal life. These policies remain in force for your entire life and build cash value over time, which can be borrowed against or used as part of your estate planning.

3. Evaluate Coverage Needs Post-Retirement

Many federal employees nearing retirement find that their insurance needs change. With no dependents or significant financial obligations, you may not need the same level of coverage that FEGLI provides. In such cases, a smaller, private policy could offer adequate protection without the high costs of continuing with FEGLI.

Factors to Consider When Making Your Decision

Whether you’re thinking about keeping, dropping, or replacing FEGLI, several key factors should guide your decision:

1. Current Financial Situation

Evaluate your financial obligations and how much life insurance coverage you truly need. If you have a mortgage, young children, or other dependents, continuing with life insurance may be necessary. However, if your financial responsibilities are minimal, reducing or eliminating coverage might make sense.

2. Health and Insurability

Your health plays a major role in determining whether you can replace FEGLI with a private policy. While FEGLI doesn’t require medical underwriting for basic coverage, private policies do. If you’re healthy, you’ll likely find better rates in the private market. But if you have significant health issues, continuing with FEGLI might be your best option.

3. Long-Term Coverage Needs

Think about how long you’ll need life insurance. If you’re approaching retirement and don’t have dependents, your coverage needs may be lower. In contrast, if you’re younger or still supporting children, life insurance may be essential for ensuring their financial well-being.

4. Retirement Benefits and Survivor Annuities

Consider how your federal retirement benefits and any survivor annuities factor into your overall financial plan. These benefits may reduce the need for large life insurance policies, especially once you retire.

Smart Choices in 2024

As life insurance costs rise and your personal needs evolve, making an informed decision about your FEGLI policy is crucial. Take the time to assess your financial situation, explore alternative policies, and weigh the pros and cons of keeping, dropping, or replacing your coverage.

Remember that no one-size-fits-all solution exists. The best choice for you will depend on your health, financial goals, and family circumstances. As you head into 2024, take a fresh look at your insurance portfolio and make the decision that supports your long-term security.

Weighing Your Options for the Future

Choosing whether to keep, drop, or replace FEGLI is a significant decision that requires careful thought. As life circumstances change, your insurance needs will, too. By evaluating your options and making adjustments, you can ensure your loved ones are financially protected without overpaying for unnecessary coverage. Whether you stick with FEGLI, explore private policies, or a combination of both, the key is to stay informed and proactive.