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Is life insurance killing you?

I recently spoke to an employee soon to be retiring from the VA.  He had a few questions about his life insurance coverage through FEGLI in retirement.  This is something that comes up on a pretty constant basis when I speak to federal employees so I figured I would address it here.  The retirement benefits from the federal government, by and large, are really good.  However, if life insurance is important to you, FEGLI leaves a little to be desired.


There are plenty of reasons for life insurance as a planning tool during your working years and beyond.  Some of those reasons are things like mortgage protection, income protection and legacy planning.  I know it is a morbid topic, but if you died tomorrow how would your family continue without your income?  Would it be helpful to have the mortgage paid off upon your death?


Let's go over some of the benefits, and drawbacks, of the FEGLI system.  FEGLI is structured as a group term life insurance benefit which means there is no medical underwriting.  So for those with underlying health issues, there is no worry about qualifying.  If you are young, the rates on that coverage will probably be very inexpensive. 


One of the problems I see is that there is a cap of five times your annual salary on the life insurance.  So if you are starting out, making $50,000 a year for instance, the most life insurance you can get with FEGLI is $250,000.  However, if you have a mortgage, or small kids, there is very likely a need for more life insurance. 


Another drawback with FEGLI is the insurance gets more expensive every 5 years.  Here is the chart OPM provides about the costs for the life insurance benefit. 



As you can see, the benefit costs increase with age.  It just so happens you are probably making more money than you did in the beginning as well so the "5 times" your salary is more. 


OPM also provides a FEGLI calculator which can be found here:



In retirement, keeping the life insurance can be cost prohibitive.  If legacy planning is something that is important, and you are planning on life insurance as part of that planning, it might be wise to deal with that situation long before retirement.


It's quite possible there is a cheaper, better alternative through the private sector for many people. As usual, contact a professional to see the different options and if they benefit your specific situation. 


Matt

 
 
 

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