Should You Keep FEGLI After Retirement? What Federal Workers Should Know About Rising Costs

Key Takeaways

1. FEGLI premiums increase significantly as you age, which can impact your retirement budget.

2. Evaluating your life insurance needs and exploring alternatives to FEGLI can help you make a cost-effective decision.

Understanding FEGLI: What Is It?

The Federal Employees’ Group Life Insurance (FEGLI) program is the largest group life insurance plan in the world, offering term life insurance to federal employees, retirees, and their families. If you’re preparing for retirement, you likely already have FEGLI coverage. But the big question is: should you keep it after retirement?

FEGLI is designed to provide financial security to your beneficiaries, but it’s not a static program. As you transition from your working years into retirement, the costs, benefits, and overall value of this coverage can shift. Understanding how the program works and how it’ll affect your finances post-retirement is key to making an informed choice.

Let’s dive into the details to help you decide whether holding onto your FEGLI policy is worth it or if it’s time to explore other options.

The Rising Costs of FEGLI in Retirement

FEGLI premiums are relatively affordable during your working years, but the story changes once you retire. Here’s why:

• Age-Based Premiums: FEGLI Option B and Option C premiums rise dramatically as you age, particularly after 65. For retirees on a fixed income, this can become a significant expense over time.

• Reduction Options: While you can choose a reduction schedule for your Basic coverage, this results in decreased payouts over time. Understanding these reductions is crucial to avoid surprises.

• FEGLI After Age 80: The premium increases can become unsustainable for many retirees, forcing some to reassess their life insurance strategy. If you’re not prepared for these hikes, they can erode your retirement budget.

Take some time to review your FEGLI coverage and the associated costs—it’s crucial to understand how much you’ll pay at various stages of retirement. A cost analysis can help you weigh the program’s value against other available options.

What Are Your Life Insurance Needs in Retirement?

Before deciding whether to keep FEGLI, it’s essential to assess your specific life insurance needs. Retirement is a period of change, and what worked for you during your career may no longer be suitable. Here are some questions to consider:

• Do you still have dependents? If your children are grown and financially independent, your need for life insurance may be lower. However, if you support a spouse or other family members, maintaining coverage may still be critical.

• Do you have significant debts? Life insurance can help cover outstanding debts like a mortgage or personal loans. If you’ve already paid off most of your obligations, your required coverage might decrease.

• Will your survivors face financial hardship? Consider whether your spouse or other beneficiaries rely on your income or will need funds to manage final expenses. Ensuring they’re financially secure is often the primary purpose of life insurance.

• What about estate planning? If you’re leaving behind a sizable estate, life insurance can help cover taxes or other related expenses, ensuring a smooth transition for your heirs.

Understanding your personal circumstances is the first step in deciding if FEGLI still makes sense for you. A needs assessment allows you to determine the appropriate level of coverage—and whether alternatives might better suit your situation.

Exploring FEGLI Reduction Options

FEGLI offers reduction options to help manage costs in retirement. Here’s a breakdown:

1. 75% Reduction: This is the most affordable option, reducing your Basic insurance by 75% over time. However, the payout shrinks significantly, which may not meet the needs of some beneficiaries.

2. 50% Reduction: Offers a moderate balance between cost and coverage, with premiums higher than the 75% option. This might be a good middle ground if you want to retain some level of benefit without overpaying.

3. No Reduction: Retains your full Basic insurance coverage, but premiums can become very high, especially after age 65. This is ideal only if your beneficiaries require the full payout and you can comfortably afford the premiums.

Choosing the right reduction schedule can significantly impact your retirement budget and the payout your beneficiaries receive. It’s important to evaluate these options early and make adjustments as necessary to avoid unnecessary costs.

Alternatives to FEGLI for Retirees

FEGLI isn’t your only option. You may find better alternatives depending on your needs and budget:

• Private Life Insurance Policies: While private plans often require medical underwriting, they can offer more flexible terms and fixed premiums. These options might be more cost-effective than FEGLI as you age.

• Term Life Insurance: If you’re only looking for coverage during a specific period, term life insurance might be a cost-effective option. These policies typically offer lower premiums but expire after a set term.

• Whole Life Insurance: This option builds cash value over time, though it’s typically more expensive. Whole life policies are a good fit if you’re looking for lifelong coverage and an investment component.

• Self-Insurance: If you’ve saved enough to cover end-of-life expenses and support your beneficiaries, you might not need additional coverage. Self-insuring can eliminate the ongoing cost of premiums while ensuring your loved ones are protected.

• Employer-Based Plans: If you’ve worked in other sectors, check whether your former employers offer retiree life insurance options. These plans often come with group discounts and competitive rates.

Explore these options to see if they align better with your financial and coverage goals. Conducting a thorough comparison can save you money and provide peace of mind.

Financial Planning and FEGLI

Your decision to keep FEGLI should fit into your broader financial plan. Here’s how to approach it:

• Calculate Future Costs: Estimate how much you’ll pay in FEGLI premiums over the next 10-20 years. Comparing this to other options can highlight potential savings.

• Compare Alternatives: Evaluate the cost and benefits of private insurance or self-insurance. Understanding what’s available ensures you’re not paying more than necessary.

• Consult a Financial Advisor: A professional can help you weigh the pros and cons and find the best solution for your situation. They can also assist in aligning your life insurance strategy with your estate planning and long-term financial goals.

Effective financial planning involves regularly revisiting your decisions to ensure they’re still serving your best interests.

Common Myths About FEGLI in Retirement

There are several misconceptions about FEGLI that may cloud your judgment. Let’s bust a few:

1. “FEGLI is always the cheapest option.” While affordable during your career, FEGLI premiums rise sharply in retirement, making it less cost-effective. Comparing it to private options often reveals more affordable solutions.

2. “I can’t qualify for other life insurance policies after retirement.” Many insurers offer policies specifically designed for older adults, often with simplified underwriting. These policies cater to retirees with varied health conditions.

3. “I’ll lose all my FEGLI benefits if I reduce coverage.” You can retain partial coverage or switch to a reduction option while keeping some benefits. Understanding how reduction schedules work can prevent unnecessary coverage loss.

Understanding the realities of FEGLI can help you make an informed decision. Dispelling these myths ensures you’re equipped with accurate information as you explore your options.

Tips for Managing Rising FEGLI Costs

If you decide to keep FEGLI, here are some strategies to manage the rising costs:

• Choose a Reduction Option Early: Selecting a reduction option before retirement can help lock in lower premiums. Acting early gives you more control over long-term costs.

• Reassess Coverage Regularly: Periodically review your life insurance needs and adjust coverage accordingly. Retirement is dynamic, and your insurance should reflect your evolving circumstances.

• Combine FEGLI with Other Policies: Some retirees find it beneficial to use a mix of FEGLI and private insurance to balance cost and coverage. Diversifying your approach can offer the best of both worlds.

• Leverage Group Discounts: If you belong to professional associations, check if they offer discounted life insurance policies.

Adopting these strategies can help you maximize the value of your FEGLI coverage without straining your budget.

When to Reevaluate Your Decision

Your circumstances may change over time, making it necessary to reevaluate your decision:

• Milestone Ages: At 65, 70, or 80, you’ll see significant changes in FEGLI premiums and reduction schedules. Reviewing your policy at these milestones ensures it’s still meeting your needs.

• Life Events: Changes like paying off your mortgage, a spouse’s death, or new financial obligations may shift your insurance needs. Regularly assessing these shifts keeps your coverage relevant.

• Health Changes: If your health improves or worsens, it might impact your ability to switch to or from private insurance. Take advantage of any windows of opportunity to secure better terms.

Reevaluating your life insurance needs every few years ensures you’re not overpaying or underinsured. Life changes often dictate adjustments in coverage, so staying proactive is essential.

Key Considerations for Federal Retirees

Here’s a quick summary of the key factors to keep in mind:

• Premium Increases: FEGLI premiums will rise as you age, particularly for Options B and C.

• Survivor Benefits: Ensure your policy aligns with your beneficiaries’ needs. Address their financial security directly in your planning.

• Alternative Coverage: Explore other life insurance options to see if you can save money without sacrificing necessary protection.

• Long-Term Costs: Calculate how much you’ll pay in premiums over your expected retirement years. A forward-looking approach prevents overspending.

Making the Right Choice for Your Retirement

The decision to keep FEGLI after retirement isn’t a one-size-fits-all answer. It depends on your unique financial situation, life insurance needs, and retirement goals. By understanding the costs, exploring alternatives, and planning for the future, you can make a decision that’s right for you and your family.

Remember, this decision isn’t set in stone. Reassess your life insurance strategy periodically to ensure it continues to meet your needs as you move through retirement.