While Federal Employees Group Life Insurance (FEGLI) provides convenient access to guaranteed life insurance protection, a little time spent comparison shopping could prove beneficial to you and your dependents.
In many cases, particularly those involving relatively young workers with dependent families, FEGLI’s coverage limits are too low to provide the benefits required to meet the needs of survivors following an unexpected death. In addition, for workers in reasonably good health, alternatives are often available at lower cost and with future guarantees not available from FEGLI.
Following is an example of the steps an employee would go through to determine his overall life insurance needs. The same decision-making process can be used for workers at any age, but each situation is unique and should be analyzed as such.
Take, for example, a 35-year-old worker, John, who earns $50,000 per year and whose income is needed to support his spouse, Prudence, and two young children. John plans to work until age 67, the age at which he is eligible to retire with full Social Security benefits. If he were to die tomorrow, his family’s financial plan would require that, in order to meet all future goals, Prudence would need to replace his after-tax income of about $35,000 per year for 32 years. This would allow the family’s planned spending and saving for education, retirement and other important goals to continue uninterrupted.
The first step the family needs to take in determining their need for insurance is to assess what death benefits they already are entitled to. John determines that, in the event of his death tomorrow, Prudence and the kids would be entitled to about $30,000 per year in Social Security survivor benefits until his children reach age 18. In addition, the Federal Employees Retirement System would pay Prudence a lump-sum death benefit of about $50,000.
Second, in order to estimate the amount of insurance that should be carried on his life, John and Prudence begin by referring to the data in the table. After a little ball-park interpolation, they estimate that, if conservatively invested, the family would need about $850,000 to provide the $35,000 annual after-tax income stream. From this, they subtract the $50,000 that will be provided by FERS and $200,000, the approximate value of the Social Security survivor benefits. The result is a need for about $600,000 worth of life insurance, or about 12 times John’s current earnings.
Then, John needs to compare this need with what he already has available through FEGLI. The maximum amount of FEGLI available to John is seven times his earnings, or about $360,000 — $240,000 short of the needed amount.
So, in order to obtain the additional insurance, he and his wife shop around for an individual policy. After some research and consideration, they decide to buy guaranteed-level term-life insurance — term insurance with premiums guaranteed to remain constant for 30 years, the length of time they expect to need insurance on John’s life. An insurance broker determines that John is eligible for a preferred rate and finds a policy from a major insurer for about $350 per year. While he’s at it, he notices that John could buy a $600,000 policy — covering his total life insurance need — for $750 per year, guaranteed for 30 years.
Now John and Prudence must determine whether to supplement or replace the FEGLI policy. So, he looks at the cost of his FEGLI premium. John’s $360,000 FEGLI coverage will cost about $475 per year at age 35. Assuming that FEGLI rates remain the same, this amount of insurance at age 45 will cost about $948 per year. After that, the premium will continue to rise. At age 50, he’ll be paying about $1,300 per year, and at age 60, his cost will skyrocket to $4,800 per year.
John and Prudence figure that the effective cost to replace his FEGLI coverage with level term insurance is the $750 per year for the $600,000 policy, minus the $350 per year he would have paid for the $240,000 in additional insurance, or $400 per year. This is $75 less than the current FEGLI cost and considerably less than the expected future FEGLI cost. The savings, along with the facts that his individual premium is guaranteed to remain level and the insurance cannot be canceled during the 30- year guarantee period without his consent, lead John and Prudence to choose individual coverage for the entire need.
Written by Mike Miles
For the Federal Times
Publication February 28, 2005