The Federal Employees’ Group Life Insurance program is the world’s largest group insurance option. The policy is specially designed for US federal employees. The goal is to make lives better and secure for federal employees after retirement. 

It covers more than 4 million US federal employees. 

Major FEGLI program benefits are – 

• Retirees can continue with coverage payment into the FEGLI program after age 65, unlike the TSP account where participants cannot contribute after retirement. 
• Participants can get accidental death and dismemberment coverage within Option A coverage for the FEGLI plan without any extra charges. 
• Beneficiaries of FEGLI policyholders get consistent death benefits when the participant passes away. 
• The federal government pays one-third of the Basic plan coverage within the FEGLI program for employees. 
• Automatic enrollment into the Basic coverage plan of the FEGLI program for new federal employees. 

Several reasons indicate that federal employees must roll over their FEGLI into an individual life insurance policy. 

The top factors include – 

• A federal employee cannot continue their FEGLI options after retirement and crossing 70 years. 
• The employees require the policy funds to clear debts. 
• Requirement of funeral fund from the FEGLI-sponsored policy.

Importance of Life Insurance for Federal Employees

Life insurance not only helps to secure the future of federal employees but also their families. The top reasons that highlight the requirement for life insurance are – 

• The money can help cover the burial and final expenses during death. 
• Cover the living expenses for beneficiaries of the federal employees. 
• Life insurance payouts help secure the future of beneficiaries such as their education fees or mortgage payments. 

This blog explores the requirements, strategies, and benefits of converting your FEGLI into an individual life insurance policy. 

The FEGLI is a group life insurance program. It has low premium rates. Also, it facilitates easy payroll deductions from the employee’s and retiree’s salaries. The Office of Personnel Management manages the rules, regulations, and requests related to the FEGLI program. 

Different Types of FEGLI Policies

Two types of life insurance options within the FEGLI program are – 

1. Basic – The employee gets coverage of their annual salary amount rounded off to the next thousand. It is added with $2,000. The federal government pays one-third of the policy coverage. Also, federal employees are automatically enrolled in the Basic benefits plan within the FEGLI program. 
2. Optional – There are three types of optional life insurance within the FEGLI program. Federal employees have to manually elect participation in these policies within 60 days of starting their FEGLI basic coverage. The three policy options include – 

• Option A – An additional individual coverage of $10,000 for the federal employee. Chances to double the coverage amount within this policy type in the event of a death. 
• Option B – 1-5 coverage payments based on the employee’s annual salary calculation rounded off to the next thousand and added with $2,000. 
• Option C – Ability to cover 5 multiples of $5,000 for a federal employee’s spouse and 5 multiples of $2,500 for their children. 

This way, the federal employee not only secures their retirement but also the financial future of their families.  

Various situations indicate the rising need for federal employees to convert their FEGLI coverage into individual life insurance policies. These are – 

Limitations Within the FEGLI Program

Younger employees have to pay a higher premium rate compared to 64-year-old federal retirees. Furthermore, there are no customization options within this life insurance plan. The rate of interest is the same for all employees regardless of their age or health condition. 

More Opportunities with Individual Life Insurance Policies

Federal employees can choose the type of policy based on different factors like age, budget, and health. Moreover, individual policies have lenient premium options, unlike the FEGLI. It protects employees from unusual age-related premium hikes. Term life and whole life policies are some common examples of individual life insurance. These policies ensure long-term savings, mitigate future financial risks, and provide emergency relief in retirement. 

Key Life Changes

Several lifestyle factors impact an employee’s FEGLI participation. For example, an employee who is switching from federal services to the corporate sector needs to convert FEGLI in case the new employer does not offer FEGLI benefits. Moreover, candidates who are eligible to retire but are not allowed to continue FEGLI coverage should convert.

Multiple types of individual life insurance policies include – 

• Term life insurance – This is a policy for a predetermined number of years. Generally, this type of policy has a maximum coverage period of 10-30 years. The term life insurance policy does not generate high cash value and requires less premium amount compared to permanent insurance.
• Whole life insurance – This is a type of permanent life insurance policy which means the policyholder needs to pay the premium amount as long as they live. Additionally, the premium amount remains the same throughout the policy span. While the rates of the whole life insurance interest remain the same throughout the course, the premium amounts are higher compared to term life insurance. 
• Universal life insurance – It is a type of life insurance policy that separately invests a part of the premium amount to grow without tax implications. Additionally, participants can borrow from such policies based on this extra cash value summation. 
• Variable life insurance – This is a type of permanent life insurance policy that allows participants to invest the cash value accumulation into other accounts.
• Indexed universal life insurance – This policy has an index-based cash value growth potential and offers death benefit protection for policyholders and their beneficiaries.

Dive into the best strategies to convert FEGLI into individual life insurance – 

Analyze Present FEGLI Coverage

There are four ways to check your current FEGLI benefits and coverage limits. The methods include signing into the OPM online service portal, emailing the official OPM ID, and calling the OPM helpline number. Furthermore, FEGLI participants can check their coverage limits by using the FEGLI calculator. 

Evaluate Your Insurance Requirements

Federal employees need to decide the type of life insurance policy and the coverage amount based on their retirement and financial goals. For example, an employee may need a huge sum of money for healthcare after retirement while others may need to pay off debts or mortgages. Similarly, another employee may need money to provide for their children’s education and welfare.

Compare Individual Life Insurance Options

Assess the differential factors of the term life and whole life insurance policy types to determine what best suits your retirement requirements. 

Term Life vs. Whole Life Insurance Policy

One life insurance policy that’s better than the FEGLI is the Worldwide Assurance for Employees of Public Agencies (WAEPA). There are more than 50,000 US federal policyholders within this program. Some of the reasons why it is a better life insurance highlight –

Remember the following points if you want to convert your FEGLI policy into another individual life insurance policy. 

Proper Timing & Secure Transition

Federal employees can convert their FEGLI coverage into an individual life insurance policy when the life insurance term is completed. Also, it is possible to switch your life insurance option in case of separation or retirement from federal employment. Consult with your retirement advisor to determine the best time to convert your FEGLI into an individual life insurance policy based on your retirement age. Moreover, policyholders need to remember that no conversion privilege is given if the FEGLI account is stopped. It is possible to fully or partially convert the components of FEGLI including the basic benefits and the additional options. Furthermore, federal employees can convert their FEGLI only into OPM-approved insurance policies. 

Impact on Beneficiaries

Determine how your retirement will affect your spouse and children. Identify the money needed to cover your family’s future. This includes your partner’s welfare and your child’s learning costs. Find out the coverage your family will receive after your death and if it is enough to sustain their future. Additionally, discover if your life insurance policy provides death benefits only throughout the policy duration or even after. 

Tax Implications Related To Rolling Over

The life insurance policy premium amount is untouched by tax rules. This means that the premium amount for the life insurance policy does not deduct any type of taxes. Moreover, the premium amount accumulated in the life insurance policy does not get tax benefits either. Moreover, the death benefits from life insurance policies are also tax-free. Furthermore, your cash value (contribution amount) grows free from tax implications in the permanent life insurance policy. Nevertheless, policyholders have to pay income taxes if they withdraw a greater amount than the premium from life insurance policies.

Factors To Acquire A New Policy

Factors that determine if a federal employee is eligible to buy a new individual insurance policy are – 

• Age of retirement 

• Pre-existing medical conditions if any 

• Driving history and violation records 

• Family medical history 

• Proof of financial stability through salary slips

It is essential to provide truthful information while applying for a new individual life insurance policy. Failing to do this can cause multiple problems including policy cancellation or application denial. 

NOTE: The chances of higher premium amounts increase with age, health, and law-related risks. 

Let us discuss the retirement benefits of individual life insurance policies for federal government employees in this section – 

Long-Term Coverage

Unlike the FEGLI which stops at the age of 70 or after retirement, permanent individual life insurance policies offer lifetime coverage to policyholders and assured death benefits regardless of the policy term. It helps federal employees save a lump sum amount for retirement, family, and the future. 

More Control Over Insurance Coverage

Policyholders get tailored individual life insurance coverage options to meet their personal, financial, and family needs compared to FEGLI –

• Exact Coverage Amount – Employees can customize their insurance policy coverage amounts based on their long-term goals, retirement objectives, financial agenda, and dependents. 
• Choice of Policy – Term, whole, and universal life insurance options compared to the temporary term life insurance from FEGLI. 
• Stability with Premium Amount – FEGLI premium increases as the employee ages and becomes extremely high when nearing retirement. However, policyholders need to pay the same amount of premium throughout the individual life insurance policy term.  
• Flexible Beneficiary Options – Individual life insurance policy enables beneficiaries to get customized payouts such as lump sums or annuities based on their financial needs which is not possible for FEGLI policy. 

Adaptable Beneficiary Options

Individual life insurance policyholders can change beneficiaries at any time of preference without any extra documentation. Individual life insurance beneficiary options include – 

1. Primary and Contingent Beneficiaries – Primary and secondary beneficiaries are appointed to collect the death benefits of the policyholder in case the primary beneficiary is absent. 
2. Multiple Beneficiaries – Policyholders can choose as many beneficiaries as they like and divide the death benefit amount among all beneficiaries. 
3. Trusts – A trust can act as a beneficiary for a policyholder in the event of the death of a minor dependent child. 
4. Charitable Beneficiaries – Individual life insurance policies enable federal employees to dedicate a complete portion of their death benefits to a charity. 

Read More: 5 Drawbacks of the Thrift Savings Plan Account

Here is a list of common mistakes that every federal employee should avoid while converting FEGLI into an individual life insurance policy. Let us find out – 

Neglecting Future Requirements

Do not ignore your retirement and future requirements. Set long-term and short-term goals. This will help to identify the ideal policy type and set the coverage amount for the policy duration. Ignoring future requirements such as educational costs for the children, mortgage for property acquisition, and healthcare expenses will cost heavily in old age without proper life insurance coverage. 

Canceling FEGLI Without Buying A New Policy

Remember to wait until your new individual life insurance policy is activated and the first premium is deducted before you cancel or reduce the FEGLI coverage. Failure to buy a new life insurance policy while giving up the FEGLI premium can be a costly mistake in the long run. All the FEGLI benefits may be canceled if the policyholder cancels their group life insurance policy. 

Overlooking Guidelines of the New Insurance Policy

Failure to read through the new policy terms and conditions can prove lethal in the long run. Remember to check all credentials and information related to the individual life insurance policy that you buy. Ask for hard-printed copies of guidelines from the insurance company for transparency. Do not let hidden charges or high premium costs affect your quality of life.

The long-term coverage option, the flexibility of premium amounts, and the multiple beneficiary choices make individual life insurance policies a popular retirement savings plan for federal employees. 

Learn more about the financial services for federal employees in Puerto Rico from PSR Assurance. We are the leading advisory firm to help federal employees achieve their financial and retirement goals consistently. 

Read the blog to find out why so many federal employees in the US are switching from FEGLI to individual life insurance policies.