You may have heard talk among your federal co-workers about dropping your FEGLI coverage at retirement. The main concern is the cost of age-based premiums deducted from your monthly FERS annuity (pension). Before you decide, consider the pros and cons.
How FEGLI Works In Retirement
Some say the reduced and/or low coverage of FEGLI Options A, B and C may not be worth the cost of premiums. However, FEGLI Basic may provide some value. The premium for Basic is on par with permanent, non-cash value insurance you can purchase from private insurers.
You also have the flexibility to choose a 75% reduction on your 65th birthday or on your retirement date (whichever is later). Then your coverage begins to decrease by 2% each month until it reaches 25% of the original amount. At this point the remaining coverage is premium free for the rest of your life.
Top Reasons Why You May Need Life Insurance In Retirement
If you decide to drop FEGLI, there are a number of reasons to consider purchasing private life insurance. It can help cover funeral costs and expenses like estate taxes or medical bills not covered by healthcare insurance.
Or, it can be used to pay off outstanding debts like car loans and credit cards at the time of death. If all of these expenses are covered when you pass away, the cash proceeds of life insurance can be a legacy you leave behind for your survivors.
“You also need to think about replacing the loss of Social Security payments when a spouse passes away.”
How Much Life Insurance Coverage Will You Need?
It all depends on your financial situation and the amount of your spouse’s income after you pass away. Under FERS, you can elect to have your surviving spouse receive 50% of your base annuity or 25% of your base annuity when you die. The reduction in your annuity is 10% for the 50% benefit and a 5% reduction for the 25% benefit.
This may not be enough to cover expenses if your spouse does not have other sources of retirement income. You also need to think about replacing the loss of Social Security payments when a spouse passes away. When both spouses are collecting benefits, the survivor only receives the higher amount when one dies. Life insurance can help make up for the loss of income created by reduced survivor benefits.
Once you crunch the numbers you may find that life insurance can be a worthwhile component of your retirement plan. Talk with an FRC® trained advisor who can discuss the advantages of private life insurance products designed specifically for retirees.
