Key Takeaways:

1. Retirees have options to keep, reduce, or drop their Federal Employees’ Group Life Insurance (FEGLI) based on their financial goals and life circumstances.

2. Many retirees choose to reduce their FEGLI coverage after retirement to avoid higher premiums while maintaining some level of protection.

Should You Keep Your FEGLI After You Retire? Here’s What Retirees Are Actually Doing

As you approach retirement, one key financial decision is whether or not to keep your Federal Employees’ Group Life Insurance (FEGLI). While FEGLI provides affordable coverage throughout your career, many retirees face difficult choices about maintaining their coverage. Rising premiums and changing life circumstances lead many to reassess their needs. Let’s explore what retirees are doing with their FEGLI coverage and whether it’s the right choice for you.

Understanding FEGLI and How It Changes After Retirement

FEGLI is a group term life insurance program offered to federal employees. Throughout your working years, you contribute premiums to maintain your coverage, and the government also contributes. However, the cost structure of FEGLI changes dramatically once you retire. Unlike during employment, where premiums are relatively stable, costs rise as you age.

When you retire, you have several options for your Basic and Optional FEGLI coverage:

1. Continue Full Coverage: This option allows you to keep the same level of coverage you had as an employee, but the premiums for the optional coverages can increase significantly as you get older.

2. Reduce Coverage: Retirees can choose to reduce their coverage by 50% or 75% over time, which lowers premiums.

3. Drop Coverage: You can choose to drop your FEGLI entirely after retirement, especially if the premiums become unaffordable or you feel you no longer need as much life insurance.

The most important factor to consider is how your needs have changed since you started your coverage. Many retirees find that their financial situation and dependents’ needs are different than when they were younger.

Why Some Retirees Keep Their FEGLI Coverage

Several factors may encourage retirees to maintain their FEGLI coverage, especially the Basic option, which can be retained at no additional cost once you reach age 65 (if you opt for the 75% reduction). Here’s why some continue their coverage:

Financial Security for Dependents

FEGLI provides a financial cushion for your spouse or children, especially if you still have financial obligations like a mortgage, outstanding loans, or dependents who rely on your income. Retirees who want to ensure their loved ones are financially protected may find it worthwhile to keep some level of coverage.

Affordable Basic Coverage After Age 65

The Basic option becomes very affordable after you reach 65 and retire because the government pays 100% of the premium if you opt for the 75% reduction plan. While this reduces the total payout over time, it still provides a base level of coverage that can help with final expenses.

No Medical Exam Required

Since FEGLI is a group insurance policy, retirees don’t need to undergo a medical exam to maintain their coverage. This can be especially important if you have developed health conditions that might make obtaining a new private life insurance policy difficult or expensive.

Why Other Retirees Are Dropping or Reducing FEGLI

For some retirees, the rising cost of FEGLI Optional coverage outweighs the benefits. Here’s why they may decide to reduce or cancel their FEGLI policy:

High Premiums for Optional Coverage

FEGLI’s Optional coverages (Option B and Option C) can become expensive as you age. Premiums increase every five years after retirement, and many retirees find that the cost is unsustainable on a fixed income. Option B, which covers additional multiples of your salary, can become particularly costly.

For example, the premiums for Option B coverage increase sharply at ages 60, 65, 70, and beyond. Many retirees opt to reduce their coverage by choosing the 50% or 75% reduction in their Basic coverage to lower premiums or avoid them entirely after age 65.

Reduced Need for Life Insurance

By the time you retire, your need for life insurance may not be as pressing as it once was. If your mortgage is paid off, your children are financially independent, and your spouse has their own retirement income, you might not need as much life insurance. Many retirees in these situations choose to reduce or cancel their FEGLI coverage to save money.

Exploring Alternative Insurance Options

Some retirees explore other life insurance options outside of FEGLI, such as private term life or whole life policies. While these may require a medical exam, they can sometimes offer more competitive rates or additional benefits tailored to individual needs.

Using Retirement Savings for Final Expenses

Many retirees feel comfortable using their retirement savings or pension benefits to cover final expenses, such as funeral costs, instead of maintaining life insurance. This can be a practical solution if your retirement accounts are well-funded, and you no longer have dependents who rely on your income.

What Happens If You Choose to Reduce Your FEGLI Coverage?

If you decide to reduce your FEGLI coverage after retirement, here’s how it works:

1. 50% or 75% Reduction Option: If you choose to reduce your Basic FEGLI coverage by 50% or 75%, the reduction begins after age 65 or when you retire, whichever comes later. For example, if you select the 75% reduction, your coverage will decrease by 2% per month starting at age 65 until it reaches 25% of your original amount.

2. No Cost for Basic Coverage: Once your Basic FEGLI coverage reduces to 25% of its original amount (if you selected the 75% reduction), you pay no additional premiums. This provides a small, free life insurance benefit for your beneficiaries.

3. Optional Coverage Lapses: If you choose to stop paying premiums for your Optional FEGLI coverage (Option B or C), this portion of your life insurance will end. Keep in mind that you cannot restart your Optional coverage after it has lapsed.

Many retirees find that reducing their coverage strikes a balance between maintaining some level of protection and controlling premium costs.

Alternative Strategies Retirees Are Considering

While FEGLI offers convenient coverage, it’s not the only option. Here are a few alternatives that retirees are exploring in 2024:

Converting FEGLI to a Private Policy

In some cases, retirees can convert their FEGLI coverage to an individual policy with a private insurer. This option allows you to maintain life insurance without the sharp premium increases associated with FEGLI Optional coverages. However, conversion policies may have different terms, and the premiums can vary widely.

Term Life or Whole Life Insurance

Retirees who want to maintain life insurance but don’t want to deal with rising FEGLI premiums are turning to private term life or whole life insurance policies. While these may require a medical exam, they often provide more predictable premiums and flexible benefits. Whole life policies also offer the advantage of building cash value over time.

Self-Insuring with Retirement Savings

Some retirees decide to “self-insure” by setting aside a portion of their retirement savings to cover final expenses. This strategy involves earmarking a specific amount in your savings or investments, which can be used for funeral costs, debts, or other financial obligations after your death.

Making the Right Decision for Your Retirement

Deciding whether to keep, reduce, or drop your FEGLI coverage after retirement is a personal decision that depends on your financial situation, health, and goals. Consider these factors:

1. Financial Needs of Your Dependents: If your spouse or children depend on your income or would need financial help after your death, maintaining some level of life insurance might be essential.

2. Affordability: Can you afford the increasing premiums for Optional FEGLI coverage on a fixed retirement income? If not, reducing or dropping your coverage may be the best option.

3. Health and Age: If you’re in good health and can qualify for a private life insurance policy with lower premiums, it might be worth exploring that option.

Ultimately, the key is to assess your needs and weigh the costs and benefits of keeping your FEGLI coverage. Many retirees choose to reduce their coverage to save on premiums while still providing some financial protection for their loved ones.

Deciding on Your FEGLI Coverage in 2024

As you evaluate your life insurance needs in retirement, it’s important to consider all your options. Whether you keep, reduce, or drop your FEGLI coverage, understanding how your financial situation and dependents’ needs have changed over time is critical. Many retirees in 2024 are finding that reducing their FEGLI coverage offers the best balance between affordability and protection.