More than 4 million participants take part in the Federal Employees’ Group Life Insurance program in the US. 

FEGLI is the world’s largest group life insurance program with billions of dollars in assets. 

Universal life insurance is a flexible and permanent life insurance that secures a person as long as they live. 

This is a lenient life insurance compared to term life and whole life insurance. Premium adjustments, death benefits, high savings options, and high cash value accumulation are some of the differences between universal life insurance with other insurance such as whole life and term life insurance. 

It is essential to understand the importance of life insurance policies beyond the limited features of FEGLI. Check out the significance of life insurance which overshadows the need for FEGLI – 

• Helps to replace lost income and secures cash flow for stable living. 
• Offers financial security to pay off debts, cover living expenditures, and pay medical costs. 
• Assists in achieving long-term goals such as an international holiday with the family or buying a dream house. 
• Protects the family and federal employees from financial losses. 
• Covers for the education and living expenses for children and spouses. 

This blog gives you complete insights into universal life insurance policies. 

This is a type of permanent life insurance with high cash-value elements. Participants can increase or decrease their premium amounts based on their requirements. Universal life insurance covers a person as long as they pay the premiums. There are two types of universal life insurance including the guaranteed universal life and the variable universal life insurance.

Universal life insurance is a flexible source of income and security for retired federal employees. Here are the top reasons why it is important for federal employees – 

Gaps in FEGLI

The FEGLI policy has several limitations. These are – 

• The maximum coverage amount is only seven times more than an employee’s annual base salary. 
• The interest rate for additional insurance under options A, B, and C increases at an interval of every 5 years. 
• Participants cannot roll over the federal employees’ group life insurance into any other eligible life insurance once they separate from federal services. 
• FEGLI is a group term life insurance so there is no option for cash value build-up. 
• It is mandatory to renew the FEGLI policy every new year. 
• It is mandatory to opt for additional coverage such as options A, B, and C within 60 days of claiming the basic insurance option. 

Changes in FEGLI Benefits

Here is a demonstration of how FEGLI benefits change after retirement – 

• When a federal employee retires at the age of 65 years, they get the option to keep the same level of insurance coverage or reduce it. 

• The basic life insurance coverage reduces by 1 percent every month until it reaches 50 percent of the original value if a federal employee chooses a 50 percent reduction of the life insurance coverage. 

• The premium amount for basic life insurance coverage reduces by 2 percent monthly until it reaches 25 percent if the employee chooses 75 percent reduction of the life insurance coverage. 

Benefits of Long-Term Financial Planning

Participants can build cash value and earn interest from this component of the universal life insurance policy. Policyholders are allowed to withdraw this cash value as partial distributions or through loans. 

This section provides insights into the functions of universal life insurance. 

Advantages of Universal Life Insurance

The universal life insurance policy functions like any other permanent policy. It provides lifelong coverage in exchange for premium amounts. Some of the unique features of this insurance policy are – 

• Cash value accumulation – The cost of insurance amount (COI) depends on the policyholder’s age and risk insurance amount. The premiums and administrative charges include the COI. Additional amounts are accumulated in the cash value portion of the policy that represents the savings component. This amount can grow based on the interest received by the insurance company. Moreover, universal life insurance offers a guaranteed minimum interest rate. 
• Flexible premiums – Premium adjustment is an appealing feature of the universal life insurance policy. This allows policyholders to pay more premiums than the COI. The additional premium amount is added to the cash value or savings component of the universal life insurance plan. Moreover, it enables policyholders to reduce their premium amounts as well. However, the premium amount cannot be reduced beyond the COI. 
• Adjustable death benefits – There are two types of death benefits within the universal life insurance policy. These are level death benefits and increasing death benefits. In the case of the level death benefit, the amount of coverage upon the policyholder’s death remains the same. Nevertheless, that cash value can increase the death benefit amount. 
• Impacts of interests on cash value – The interest rates upon the cash value of universal life insurance policies depend on the market interest rates. Moreover, the money within the universal life insurance policy is not affected by tax deductions or benefits. 

Disadvantages of Universal Life Insurance 

Similar to several benefits, there are drawbacks to investing in a universal life insurance policy as well – 

• Chances of higher premium amounts if there is a decrease in the cash value component. The policy may lapse if premium amounts do not cover the cost of insurance. 
• The cash value drops if the interest rates drop for universal life insurance policies. Therefore, there is no guarantee of returns from the cash value component of UL policies, unlike the whole life insurance. 
• Beneficiaries cannot get the cash value component of universal life insurance policies if the policyholder dies. They will only get the death benefits. So, it is only possible to use the cash value of this type of life insurance as long as the policyholder is alive. 
• Taxes are deducted from a universal life insurance policy cash value withdrawals if the distribution amount exceeds the premium amount.

Read More: Guide To Veteran Affairs Disability Benefits Tax Rules

Major universal life insurance differences from other types of policies indicate – 

• This is a permanent life insurance compared to term life insurance which is a temporary option. Universal life insurance policyholders need to pay premiums for this type of insurance as long as they are alive. 

• Policyholders of UL insurance get cash value benefits which are missing for term life insurance policies. However, the cash value benefits are also available within the whole life insurance plan. 

• Flexible premium amounts which can be more than the cost of insurance compared to fixed premiums for whole-life and term-life insurance. 

• Adjustment of death benefits with cash value addition is present in universal life insurance but absent in whole life insurance where death benefits cannot be manipulated. 

• There are no dividend options in universal life insurance policies which are present in whole life insurance. Additionally, dividend options vary for term life insurance policies depending on the company’s offerings. 

• Different types of universal life insurance policies allow investment in stock market indexes or mutual funds. This option is not given to policyholders or term life insurance policies. 

The universal life insurance policy is an ideal option for federal employees if they want the following – 

• Permanent death benefit protection with a flexible premium structure that can be adjusted at any time and by any amount. 
• Change coverage amount as per changing life events. 
• Whole-life protection with low premium options. 
• If you want to replace or add an extra source of income apart from the Federal Survivorship Pension.

Additional Factors To Choose the Right Life Insurance

Assess the coverage needs including death benefit calculation, debts, family needs, and sources of income. Focus on the following points to find an appropriate life insurance provider – 

• Federal employees need to ensure that their FEGLI coverage settles their lifelong expenses. If it does not, then it is time to look for additional sources of income upon retirement which is possible through the purchase of life insurance. 
• Consult with an advanced federal retirement financial advisor who can help to choose an appropriate insurance policy based on requirements. 
• Ensure the coverage from the life insurance policy is financially strong. 
• Review different types of policies based on your retirement age, additional expenses, and long-term goals

Read More: How To Roll Over FEGLI To An Individual Life Insurance Policy

The cost of FEGLI premiums increases with age. Moreover, federal employees cannot continue FEGLI contributions or get the benefits if they separate or retire from federal services. Consequently, the coverage amount decreases as the federal employee ages. Most importantly, retirement from federal services disables an employee to continue with their FEGLI contributions. 

Therefore, it is ideal to switch to a universal life insurance policy. Policyholders can get tax-free withdrawals based on certain criteria from the universal life insurance. Furthermore, federal employees can maintain both types of life insurance including the universal and the Federal employees’ group life insurance. 

Permanent protection, flexible premium amounts, an additional source of income, and cash value optimization make universal life insurance a popular option compared to term, whole, or group life insurance.

Some of the tax implications for universal life insurance withdrawals indicate – 

• Income tax-free death benefits for beneficiaries in case of the policyholder’s death. 
• Tax-free loans from the cash value portion of the universal life insurance. 
• Tax-free withdrawal from the universal life insurance if the distribution amount does not exceed the premium amount. 
• There are no withdrawal penalties or age limits to withdraw from the universal life insurance.

The universal life insurance policy is a beneficial plan for federal employees because of its flexibility, long-term coverage, and cash value component. 

Nevertheless, it is pivotal to evaluate individual needs and consult with an expert financial planner for federal employees to get a competitive analysis of the best life insurance policies. 

Secure your family’s future with PSR Assurance and achieve your long-term dreams with the help of FEGLI and universal life insurance policies. Get financial services for federal employees in Puerto Rico.