The Federal Employee Group Life Insurance (FEGLI) program is one of the largest group plans in the world, with over 4 million federal workers and retirees. It is made up of four components: basic coverage, and then options “A,” “B,” and “C.” In order to receive “A,” “B,” and “C,” you need basic coverage. However, each of these options covers you in different ways. So, in this episode, Michael, Tommy, and John will be explaining what each of these components entails.
Listen in as they break down how the federal government makes the expense of this coverage more manageable, as well as the benefits (and disadvantages) of each option. You will learn what might happen if you drop Option B, why you should get your own insurance first, and how to get coverage for your spouse and children.
Listen to the full episode here:
What you will learn:
- The four components of FEGLI. (1:25)
- How to figure out how much FEGLI basic life insurance we have. (2:05)
- What to be aware of before you select “no reduction.” (6:40)
- What you should know about FEGLI basic. (7:20)
- What is included in Option A. (8:20)
- The benefits and disadvantages of Option B. (10:45)
- An overview of Option B. (15:50)
- Who Option C covers. (22:08)
- Why you don’t have to wait until “open season” to apply. (26:15)
- Why this is a once-in-a-lifetime opportunity. (30:00)
- The benefit of having life insurance. (34:34)
Ideas worth sharing:
“The cost of Federal Employee Group Life Insurance Basic is the same for everyone.” - Mason & Associates, LLC
“The only reason you pay more is because you’re making more [when it comes to FEGLI Basic].” - Mason & Associates, LLC
“Life happens fast.” - Mason & Associates, LLC
Resources from this episode:
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Read the Transcript Below:
Congratulations for taking ownership of your financial plan by tuning into the Federal Employee Financial Planning Podcast, hosted by Mason & Associates, financial advisors with over three decades of experience serving you.
Michael Mason: Welcome to the Federal Employee Financial Planning Podcast, hosted by Michael Mason, certified financial planner; John Mason, certified financial planner, and Tommy Blackburn, also certified financial planner, certified public accountant.
Mason & Associates have over three decades of experience helping federal employees with their financial plans. And this episode, Federal Employees Group Life Insurance, otherwise known as FEGLI, Federal Employees Group Life Insurance.
So, you have about four components of FEGLI. You've got FEGLI Basic, you've got FEGLI option A, which is just 10 times or $10,000. FEGLI option B, where you can choose one to five times your salary, and additional life insurance. And you've got FEGLI option C, which is spousal coverage and coverage for children. And those children can be dependents, I mean, they can be adopted, they can be natural. And it's one to five times.
So, we're going to go through all these in detail. Let's start guys with FEGLI Basic. FEGLI Basic — John, tell us how we figure out how much FEGLI Basic life insurance we have.
John Mason: Mike, FEGLI Basic, not to be confused with FEGLI option B. So, FEGLI Basic is different than FEGLI option B. The basic insurance amount is calculated by taking your salary, rounding it up to the next thousand, and then adding 2,000 on top of that. So, if the annual income is 99,500, you have Federal Employees Group Life Basic coverage of 102,000.
Michael Mason: Outstanding. And the cost for this group life insurance is the same for everybody. The only thing that changes the cost is what your base pay is. So, the cost is 32.50 per thousand dollars of coverage. And I don't know why the insurance industry does this, but they always price it in thousands of coverage.
So, if you have a hundred thousand dollars of coverage, that's 100 thousands, and 100 times 0.325 is $32.50. Tommy, that's expensive coverage for somebody that's under age 35. So, what does the federal government do to kind make that pain a little less painful?
Tommy Blackburn: The federal government, when you're under 35 for FEGLI Basic, they are going to double it. So, in the example earlier, John said, we're making 99,500, gives us 102. If you're under 35, you're still going to pay the same amount. But instead of getting that 102,000, you're going to get 204,000.
Michael Mason: So, we're going to pay for the 102, we're going to get 204,000. So, effectively, we've cut that price per thousand and half from 0.325 to 16.25 since per thousand, and that's a big help.
And then you've got this range zone between 36-years-old and 44-years-old, where that doubling component begins to reduce. So, at 36, you have 1.9 times the basic life insurance. And by the time you get to 44, it's only 1.1 times, and that at 45 and beyond, it's your base pay rounded to the next thousand plus 2,000.
Make sure we understand that base pay includes your locality adjustment. So, it's your base pay, plus your locality adjustment. John, what are the options at retirement?
John Mason: Number one, Mike, you have to have had this coverage for five years leading up to retirement to be able to continue Federal Employees Group Life Basic and Retirement. That's true for all aspects of Federal Employees Group Life.
So, assuming you've had that coverage for five years, when you retire, you have effectively three options. Option one is what's called the no reduction, which means you'll continue paying premiums for the rest of your life. And that insurance amount of 102,000 in our example, will remain constant.
Option two is what's called the 50% reduction, which again, this involves you paying premiums for the rest of your life, but at retirement, that coverage will begin reducing from 102,000 down to 51,000.
And then finally, the third option Mike, is what we typically recommend, which is the 75% reduction, which ultimately, results in no premiums being paid and coverage reducing down to 25% of the original value.
So, in that example, 102,000 times 0.75 would be the reduced amount of coverage that this retired federal employee would carry for the rest of time.
Michael Mason: So, if we assume, let's say, retirement at age 60 and you elect, let's use the 75% reduction option from 60 to 65, you're going to continue to pay the same premium you were paying all along. And then at 65, the premium stops and your coverage reduces by 2% a month until it's been reduced by 75,000.
So, if we just figure a hundred thousand gets reduced to 25, but then you end up with $25,000 of coverage for free for the rest of your life. The reason we don't really like the 50% reduction option and the no reduction, is in that zone I just talked about, 60, retirement — if you elect no reduction, you've got to pay a premium for the no reduction and you've got to pay the basic premium as well.
So, for that five-year period, you're going to come out of pocket pretty substantially for either the 50% reduction or the no reduction. At age 65, they will drop off the basic premium. But if you're electing that no reduction or 50% reduction, you're still going to pay that bogie for that extra coverage for the rest of your life. So, it's an important note.
Alright, Tommy, so we've talked about FEGLI Basic and how it's working. Let's give them Mason & Associates takeaways of FEGLI Basic.
Tommy Blackburn: Our typical takeaways of FEGLI Basic is that we think it's a fair premium of what you pay for what you get. We also think that the older you are, the better the premium looks, and we really like that you're going to get permanent insurance for the rest of your life of 25% for free for the rest of your life.
Michael Mason: You know, we've got a lot of federal employees at NASA and many VA hospital doctors that work well into their late sixties, early seventies. And that Federal Employees Basic Life Insurance, the only reason you pay more is because you're making more. It's not because you're older.
John, how about you tackle FEGLI option A?
John Mason: FEGLI option A, I don't even really know why FEGLI option A exists to begin with. It's a very unique coverage in that it's only $10,000. So, I don't know if the original intent of it was maybe burial or final expense type policy.
So, FEGLI A is $10,000 of coverage for all people. You cannot increase it, you cannot decrease it. It's just a flat $10,000 of coverage. Unlike FEGLI Basic, the premiums for FEGLI option A are age banded. So, the premium for a 35-year-old is different than a premium for a 45-year-old or a 55-year-old.
And then there are some different nuances as we get closer to retirement and we're thinking about retiring. You have all those options under FEGLI Basic, Mike — the 50% reduction, the no reduction, the 75% reduction. Well, under FEGLI option A, there's just one option and FEGLI option A is going to reduce from $10,000 to 2,500. And that reduction begins at age 65.
Michael Mason: You know, if you have FEGLI option A, you might as well keep it at retirement because it's fairly cheap and it's 65, no premium. And you're going to end up with $2,500 of coverage.
Anyhow, if you don't have FEGLI option A, it seems like a whole lot of work to go out and get it for only $10,000 of coverage. That's kind of our position on A. Just like John said earlier, maybe just a non-player really in the scheme of things.
And then FEGLI option B, this is where many people have a whole lot of their life insurance and you can choose one to five times your base pay. So, they take the base pay. Again, that includes locality, round it to the next thousand. So, if you're at 99,100, rounded to a hundred thousand, you can have one unit which is a hundred thousand of coverage or five units, which is 500,000 or anywhere in between.
The premiums are based in five-year increments. So, 40 to 44 is an increment. 55 to 59 is another one. And again, the price is quoted per a thousand dollars of coverage.
Tommy, who do we think wins here in FEGLI B and who may be overpaying in FEGLI option B?
Tommy Blackburn: For our younger employees, it seems like those age bracket numbers work out, that is competitive. And what we see is once you get into your fifties and beyond, if you're healthy, this is not a competitive rate. And if you can go out and get insurance on your own because you are healthy, you can probably pay substantially less.
It's also where we might talk about later (I think we will) — this is when people in their fifties tend to start paying attention to what FEGLI cost.
Michael Mason: Right. It's not unrealistic to believe; you started at the federal government, you were young, you elected five times your pay and FEGLI option B. It's not tremendously expensive, it's really competitive there.
But now, you're hitting 40, 45 and 50. And we just did some numbers here. At 50, 500,000 of coverage and 50-years-old, FEGLI option B is $119 a month. And then at 55, it's 216. And then it doubles at age 60 to $476 a month. And at 65, if you still have it, it's $585 a month.
Over 20 years, that 20 years I just described from 50 to 70, FEGLI option B at 500,000 would cost everybody. If you're superman buying it or a superwoman, it's going to cost you $83,000. If you're the most unhealthy person that you've ever met in the federal government, it's going to cost them the same $83,000.
We're going to have a comparison of this at the end of this section, but $83,000 over that 20-year period is expensive. And here's why it happens: it's a thing called adverse selection, and it happens in most group policies. You get in with absolutely no underwriting.
You're young when you get in, and then all of a sudden, you start hitting these 45, 50, 55 age groups. And when you see these uncompetitive premiums, if you're a healthy, non-smoker, you get out.
If you've had a surprise and you weren't paying attention or even you thought, hey, at 50, I'm getting the heck out of FEGLI, I'll do something different, and the 49, you have a heart attack, you're stuck. You're stuck in that plan. That's adverse selection where the group becomes made up of more unhealthy than healthy and the premiums go up accordingly.
So, let's talk about what it looks like in retirement. Either one of you guys can take that. What does it look like in retirement?
John Mason: Mike, piggy-backing on what you were saying with the group life, I think a good comparison to this is also, Servicemen's Group Life for active military members that then converts to VGLI or Veterans Group Life at retirement, very similar program.
SGLI — very cheap, very inexpensive, very good deal. But the second that group coverage switches from servicemen to veterans, you start seeing these five-year age bands. And again, that adverse selection is really, really apparent.
So, again, under the caveat that you, as a federal employee have maintained, Federal Employees Group Life option B for five years, it's key that you've had this for five years too. And you also can't keep option B and retirement, Mike, if you don't keep some version of Basic in retirement. So, we have to really think about what we're doing here.
So, let's assume I'm retiring as a federal employee, I'm 65-years-old and I'm carrying five times my pay in Federal Employees Group Life, I have a couple of options.
Option one is I could just say “I met with my financial planner, I don't need this coverage anymore. Drop it.” And we're going to come back, hopefully, you guys will come back as why that's not a good thing: “I'm just going to drop it because my financial planner said I don't need it.”
Option two could be, “I want to keep some or all of these multiples around for the rest of my life.” So, you actually get a choice as a retiring federal employee: do I want to have one multiple, stay around for the rest of my life? Or do I want to have five multiples stay around for the rest of my life?
And maybe you guys can pick me up here and if I say I want to have four that stay around for forever, what happens to that one? That extra one.
Michael Mason: So, if you're going to take that one and you retire before age 65, it's just going to go away the minute you retire. So, you're comfortable paying for those four options of B into retirement which probably means that you've done some poor financial planning because that's going to be expensive life insurance for the rest of your life.
But that one option that you said I wanted to reduce, a financial planner that works with federal employees is absolutely going to have you make that option versus just get rid of it because you're 65, you've retired, and it's free when it's reducing.
So, it will reduce at 2% a month — and let's assume it's a hundred thousand: you'll have a hundred thousand of coverage the first month of retirement, then it's going to reduce by 2%. It's going to take 50 months for it to reduce completely. So, you've got that coverage free for that 50-month period.
John Mason: So, Mike, in summary, FEGLI option B, it's expensive. It can be a good deal when you're like early on in your career, good deal in your thirties and forties, but we really need to start looking at the financial plan: 45, 50, 55-years-old, because we need to determine A, how much life insurance do we need; B, how long do we need it for? We should have these questions answered well before retirement age.
But let's assume now we are retiring and we have this choice. Maybe you've just met with a financial planner for the very first time. You're 65-years-old and your planner says “You have survivor benefits, you do not need this expensive FEGLI option B.”
But the problem is that this planner doesn't specialize with federal employees. So, instead of encouraging you to elect the 100% reduction on your FEGLI option B, you instead, as the federal employee, go in and drop it. These are two polar different, polar opposite.
Dropping it means it's gone instantly. The a hundred percent reduction means it takes 50 months to go away. So, we would never for somebody who's 65 or older — I can't think of a reason why we would ever encourage somebody to drop it. We would encourage them to take that a hundred percent reduction.
And I guess it gets further complicated. And we've seen this, guys, meeting with our clients, is that what if you're working with a 65-year-old who doesn't want to retire until 67? Now, it's like, holy cow, do we pay for it for two years so that we have the 50 months free after that?
We have to run the numbers, we have to make an educated decision, but at least we're having that conversation because we know 50 months of free coverage is potentially available.
Michael Mason: And an important point there, John, is the only way we would ever run into a 67, 65-year-old that still had option B times five, is that they haven't been a client for the last 10 years.
So, to your point, if you went through that pain of 60 to 65-year-old premiums for option B, and then you meet a financial planner, and then the financial planner says, “You're retiring, you can't afford this, drop it,” well, you went through the pain of the worst premiums, at least get some free coverage during that first 50 months of retirement.
John Mason: And Tommy, real quick, for the folks listening, I think one way we can summarize this in a visual is opm.gov, Standard Form 2818. Standard Form 2818 is the continuation of life insurance coverage as an annuitant.
So, this summarizes not as … forgive me, not as eloquently as we've been summarizing it for you on this podcast, but this gives you your options. It highlights what you can do with A, B and C, what your options are with Basic. So, again, opm.gov, Standard Form 2818,
Michael Mason: And one other good spot to go is just google FEGLI calculator. And you just put it in the Google search “F-E-G-L-I calculator,” and then put these numbers in and then hit the retirement tab so that you can see what option B is going to cost you at these different levels.
Here's our position: Federal Employees Group Life option B is competitive for younger employees and for smokers and folks that are not healthy. If you're healthy and you're a non-smoker, you may want to look for something different. We would want you to look even in your early years for something different.
And that something different would be a 20 or 30-year term. If you're 30-years-old, it's probably going to be a 30-year term. And here's why we want you to look at that — because life happens fast and you could have five times you're paying FEGLI option B, and it's a great premium, and you wind up 40-years-old, and you're like, boy, at 45, I'm getting the heck outta here, and then your one doctor visit away from being stuck.
So, we really like getting your own insurance first. And let me just give you some examples of this: we mentioned it earlier, from 50 to 70 the most expensive years for Federal Employees Group Life Insurance. If you had $500,000 of coverage, you are going to spend $83,000 in FEGLI life insurance, whether you are superman or superwoman or the most unhealthy person you know in the federal government. A non-smoker, preferred non-smoker in a 20-year term would spend 19. Let's just call it 20,000.
That's $63,000 less. Even if you're just average good health, you're going to spend 50,000 less. Imagine what that looks like in your TSP or against a mortgage on a house.
So, this is something you just have to take a look at. FEGLI option B probably not the place you should be carrying a bunch of life insurance.
Let's move on to FEGLI option C. Who does that cover Tommy? FEGLI option C.
Tommy Blackburn: So, FEGLI option C is going to cover spouse and children coverage. I wanted to go back for a second though before we get further into FEGLI option C, and I thought it was great that we were throwing out the numbers for what it would cost for 50 to 70, whether on a private policy versus the FEGLI coverage, just to illustrate that true financial planning, we're looking at, do we need it? What are the costs? Where are other costs?
So, while we don't sell life insurance, we absolutely consult with our clients on this and we have providers. And so, we got these quotes from a provider we use, an independent broker, low-load insurance services.
So, we're able to still shop these for clients, even though we're not compensated to do this for them. So, we're always looking to see what the best deal is. And when it makes sense to end the plan, as Mike said, we think getting that individual term in place early on in life is probably the best solution. But depending on where we are, when we begin our financial planning process, we have to make decisions at that point in time.
So, moving forward to option C again, which is spouse and children coverage, you can similar to B, you can choose between one to five units of coverage. And for a spouse that's $5,000 per unit, so the maximum five units is going to get us $25,000 of coverage. And for children, it's 2,500 each. So, the maximum's going to be 12,500. If we get the five multiple.
Michael Mason: And it's important to note that you don't make a choice on both. You either get one multiple, 2, 3, 4, or 5. If you get five, you got five multiples for your spouse and you got five multiples for your children. And the price is the same whether you have one child or 10 children.
So, if you choose maximum coverage, you're going to have 25,000 for a spouse, 12,500 for children. And then in retirement, John, what does that look like?
John Mason: In retirement, you have similar options, Mike, to FEGLI option B. You can elect, do I want to keep some of these multiples around? Do I want to keep none of the multiples around? Should I just drop it?
So, you have the similar options under FEGLI option C as you do under FEGLI option B. And then you mentioned family: family is family, kind of like health insurance. So, you have 10 kids, federal employee health benefits is the same premium as if it's a husband, a wife, and one child similar with FEGLI option C.
Michael Mason: Our opinion on FEGLI option C, it's okay for families with multiple children. But the same can be accomplished, as Tommy was talking earlier in a private sector term policy. You can add a children's term rider. And for one small price, you cover all your children under that.
Most of the families we work with, the spouse provides a huge benefit, even if that spouse is a stay-at-home spouse, or if that spouse is a hundred thousand dollars a year employee, $25,000 of coverage for either of those spouses we just talked about, is not enough. Children are only covered through age 21. They can be covered later than that if they have a disability, mental, or physical past age 22.
Premiums don't change, whether, again, you have one child or multiple children. So, we're kind of ambivalent on FEGLI option C and that it can just be accomplished probably better in other places.
I guess the one thing you get with option C when you first start, is with all of it, there is no underwriting. So, if there's medical issues when you first start with the federal government, it's probably a good reason to take as much as possible and then figure it out from there.
Michael Mason: We have some interesting notes as we wrap this up. So, we'll go through some of these, I'll take some of them and my teammates will take the other.
John's mentioned it several times to continue any coverage into retirement, you must have had it for the five years leading up to retirement. And then you can continue it, or as long as you possibly could have had it.
If you started today and four years from now, you have a disability retirement, well, you had the coverage as long as you could have had it, so you get to keep it. No underwriting for new employees. So, you get maximum coverage for yourself, your spouse, and your children with absolutely no physical underwriting.
Something, guys, that is missed a lot, employees can apply for coverage at any time and they can drop coverage at any time. There's a misnomer out there about open seasons. John, how about you take the open season misnomer that we've seen for multiple years?
John Mason: So, open season, the annual benefits enrollment that typically takes place in November is typically for health insurance, dental, vision, et cetera. There is no “open season” for life insurance. There is no typical open season for long-term care.
So, if you're meeting with your financial planner or you're talking with your spouse, and you're saying, “Wow, I think we need more coverage,” you can apply for life insurance or long-term care at any point.
If you are applying for Federal Employees Group Life, you do have to go through medical underwriting. So, for example, we've helped clients or encouraged clients, Mike, to apply for Federal Employees Group Life Basic five or six years before they're going to retire, because we know they'll have that 75% reduction and end up having free coverage for the rest of their life.
So, there is no special open season. You can apply for that at any time, but you will go through similar underwriting as you would, if you were to apply for like a term life or a universal life in the private sector.
I mentioned guys that there's no open season for life insurance. And that is partially true because when we say open season, what we mean is an annual benefits enrollment open season. There has been three life insurance open seasons, and the last one I believe, was September of 2016.
Michael Mason: So, September of 2016, I've seen two others of these. The first one we saw, we helped a lady with juvenile onset diabetes apply for maximum life insurance coverage. She was turned down everywhere on the planet because that's not an easy thing to overcome.
She was turned down during the open season, got five times her pay in FEGLI option B plus Basic. Unfortunately, sometime within 10 years after that, passed away. But that protected her spouse forever in the 2016 open season.
I remember making a phone call on my golf trip. We had sent out a blog, we'd sent out emails, and I knew this one client who had battled cancer had not responded. So, on the way to the golf trip, I picked up the phone, called the spouse and I said we really need to make sure that we take this opportunity.
Now, during the open season, there's no underwriting, you can get maximum coverage. The caveat is that you have to wait 12 months. So, this open season ended September 30th of 2016. John, I believe you're right on the year.
If you were still alive, October 1 of the next year, the insurance kicked in and the premiums kicked in. This lady was $700,000 of life insurance within 12 months, unfortunately passed away. That's $700,000 of wealth to that family from a phone call on the way to the golf trip.
So, these open seasons, the government should call them something other than open seasons, so folks know what the opportunity truly is.
John Mason: They should be called a once-in-a-lifetime opportunity. This is never ever going to happen again, things should go out with red exclamation marks and emails and red envelopes.
But unfortunately, Mike, I've been doing this 11 years and we've been fortunate, federal employees have been fortunate enough to have a long-term care open season and a life insurance open season.
And how many times have we heard during those two open seasons, “Oh, well, I'll just get around to it next year?” It's like, “Man, you have cancer, there's not going to be a next year. This is a once in a lifetime opportunity.” Or “You had a stroke, you're not going to be eligible for long-term care because there's not going to be another one of these long-term care open seasons.”
We shout from the rooftops, we do radio shows. We do everything we can to get the message out. It's tough. It's really, really hard and a tough pill to swallow because I don't think all is being done to educate federal employees across the country on these once-in-a-lifetime opportunities.
Tommy Blackburn: I think we all agree with you, John. And you went through a few examples of if you have cancer, if you have these medical conditions, most time, we have no idea. But if we can get in with no underwriting, that's the easiest we're ever going to get our foot in the door, let's do it.
And then as we've talked about through this entire podcast, we can drop it at any time. So, let's take advantage of the easiest opening you're ever going to get. And then we can later decide this wasn't worth it, I don't like — whatever have you, but take advantage of the easiest example you're going to get.
John Mason: And continuing down that path, Tommy, we have a lot of people that call our office and say, “Hey guys, John, Mike, Ken, Tommy, I'm a brand-new federal employee. Maybe I'm retired military and now going, I have a GS14 or 15 offer. What type of benefits should I enroll in?”
“Well, this is an introductory phone call, Mike, we can't give advice on an introductory phone call. But there's one thing I can say, I think that will not get me in trouble: is if you're a good fit for us, we would like to do your financial plan. I'd like to hold all the cards. So, I think it would probably be good idea for you to enroll in five times FEGLI option B, federal long-term care. Buy everything, get everything,” because then, when we can get you in to do your financial plan, like Tommy said, we can always drop those things.
So, as these open seasons come around, once in a lifetime opportunity, you can enroll. If you're a brand-new federal employee, similar once in a lifetime opportunities, or if you have a neighbor — there's going to be people Mike listening into this podcast whose neighbor or family member just took a new job somewhere in the private sector.
Same deal, same options, same opportunities, maybe a little bit different with the programs that are offered, but it's the same concept. You can be somebody's hero. Our listeners on this podcast can be somebody's hero by sharing this podcast with them, talking about no medical underwriting, talking about these once in a lifetime opportunities.
Sometimes these life insurance podcast … and this is the Federal Employee Financial Planning Podcast, talking about life insurance. Mike, it's not sexy. People don't like life insurance. Maybe we had people turn it off halfway through because they were bored.
Well, I hope somebody shares it with them because this is your opportunity to be somebody's hero and change somebody's life. Very few opportunities to do that with things other than taking advantage of life insurance long-term care, et cetera.
Michael Mason: I just want to finish the FEGLI open season and Tommy, you made such a great point. We spent an inordinate amount of time telling our clients and anybody on the radio that would listen to put their foot in the door. And what do we mean put the foot in the door?
We actually called clients that we encouraged to replace FEGLI option B with a 20-year term five years earlier. And we call them and say, “During this open season, put your foot in the door and get maximum coverage.”
And they said, “Mike, Ken, John, why would I do such a thing?” And we said, “Because we don't know what your life is going to look like 12 months from now. It cost you nothing to put your foot in the door. Put it in there, apply for five times. You're going to get it. You may wake up 12 months from now with a diagnosis. If you do, your foot in the door was a good thing. If you don't, then you just drop it and you never pay for anything. It cost you nothing to put your foot in the door. Government's not going to tell it to you that way, only financial planners that specialize.”
One other thing within Federal Employees Group Life that people don't talk about enough is the terminal illness rider on FEGLI Basic. John, tell us about that.
John Mason: If you are terminally ill, Mike, and I believe your life expectancy is 12 months or less, then there's an accelerated death benefit rider, terminal illness rider that basically says you can go in and grab that death benefit to use it right now.
You could use it to prepay for funeral expenses. You could use it to pay off the house, you could use it to take the vacation of a lifetime. The thought process here is that you can get an advanced payment on that death benefit. So, it's the accelerated death benefit or terminal illness rider.
Michael Mason: And most folks would probably think and financial advisors might think this same way because they're not outside the box like we are. If everything's in order, why do you need that 100 to $150,000 today versus six months from now or nine months from now when you pass away?
Well, what if you're 65, John, and you elected a 75% reduction option, and you unfortunately, have one of these terminal illnesses. What was one of the strategies we implemented there?
John Mason: So, we have to go back to the beginning of the podcast. Remember, Mike, that 75% reduction says if I have a hundred thousand of Federal Employees Group Life, over a three-year period, it's going to reduce to 25,000.
So, I'm 65, and I know that reduction is happening. Well, at 65 in one month, I'm diagnosed terminal. My life expectancy is 12 months. So, I have the ability to access that accelerated death benefit. Should I do it or should I not?
Well, if you don't do anything and you live three years, then your death benefit's 25,000. But if we access it right now, we only experience one month of reduction and we were able to claim a higher death benefit of amount now, rather than letting it reduce.
There's a chance you can get better. There's a chance you can get better. Maybe you can help me out here, I don't know if I remember correctly: I don't think you have to pay it back. So, if you access that accelerated death benefit, you do not have to pay it back.
Michael Mason: You don't have to pay it back. And there was a little bit of a caveat, and if Ken was here, he could help us because he experienced this; that maybe it was a three or four-month decline, but it wasn't a 12-month at 2%.
So, it absolutely, and that scenario makes sense — get it at this number, set it aside, use it for one of those vacation or whatever or prepay things or just get 75,000 versus 25. You know, we are always hoping for you to get better.
As we wrap this up guys, Mason & Associates’ position on life insurance, especially in the federal marketplace, we like our clients to know early in their career that they're going to retire and take survivor benefits because that is a form of life insurance.
We have a saying that says if you can afford to retire, you can afford to die. Your cash doesn't die with you, your TSP doesn't die with you. If you took survivor benefits, your spouse is going to get 55 to 60% of your retirement.
So, we have to get you to the point where you can afford to retire. And we do that with 20 or 30-year term life insurance, fixed coverage, fixed premium. And then when that runs its course, that's when we're switching over to survivor benefits at retirement.
We like FEGLI Basic. FEGLI Basic, you're going to have something for free at the end of the rainbow. You're going to have 25% of your effectively, your highest earning years plus 2000. You're going to have that for free forever. So, we absolutely like that.
Tommy, we wanted to do takeaways. So, let's talk about our takeaways from the FEGLI Federal Employees Group Life Insurance show.
Tommy Blackburn: Sure. One of the first takeaways that I can think about as we've been talking about, is just start by taking a look reviewing your LES. Take a look at that pay stub, see what you're paying currently. Get one of those compensation statements and see what exactly you have in place, how much it's costing you, just be aware of what you have.
And John, as I'm thinking about this takeaway, just looking at that, the value of ongoing financial planning and having that ongoing advisor in your corner: an example that we recently came across just by taking a look at that.
John Mason: So, in 2011 or 2012, Tommy — Ken and I were working with this particular client who had five times FEGLI option B, was probably 50-years-old, fit this show to a T. And we encouraged them. We were like I think “Mr. and Mrs. Client, what would be very good is to fill out Standard Form SF2817. Drop your FEGLI option B, drop your FEGLI option C, but please retain FEGLI Basic.”
And this particular client did just that. Unfortunately, there was a keystroke error in the human resources department and one tiny little line on a leave and earning statement went from there being a biweekly FEGLI premium to there being no FEGLI biweekly premium.
Unfortunately, I didn't catch that. I didn't catch it until the client was about to retire, but I was able to go back in the history, I was able to go back through our recommendations and “Mr. Client, there's no way that we would've dropped Basic.” We pulled up the old LES, we pulled up the new one.
This client was able to retire Tommy. We were able to pinpoint the keystroke error at human resources and we were able to get that FEGLI Basic back in force.
Michael Mason: Folks, it's been a pleasure tonight. My final comment, let John close down the podcast.
Financial planning versus financial reacting, Tommy talked about look at your leave and earning statement. You started to work for the government 35 years ago, you did exactly what John Mason told you to do. You took five times your pay in option B and maximum insurance, and you haven't looked at it in 35 years.
And all of a sudden, you're supposed to get a pay raise January of 2021. And you wake up and your pay is $400 a month, less than it was. And you look at that pay stub and you're like, “Boy, I turned 60 or I turned 65 and FEGLI is ridiculously expensive.”
So, you do the wise thing or at least what you think is the wise thing. You look at your FEGLI the second time in your entire career and you say, “Boy, it's $500 a month, I'm not going to do that.”
So, without any interaction with a financial planner, you just drop FEGLI life insurance. That's not really financial planning, that's financial reacting. You should seek out a financial planner that can help you as a federal employee.
You should know at 50, 55 or 60, when you're 30, 35 or 40, what you're going to do at those age points. That is financial planning, not financial reacting.
John Mason: Mike, maybe you'll like this one: just because your FEGLI premiums doubled, doesn't give you a license to drop it. So, this is not a license to drop, it's a license to shop. Shop for a qualified financial planner that can help you determine how much you need. Shop for a life insurance that can help you do it, maybe the same or better for a lower premium.
So, remember, if you're a federal employee, not a license to drop because we know it's getting expensive — a license to shop, license to figure out how does this insurance need to be a part of your permanent plan.
Folks, thank you for tuning in and listening to this Mason & Associates Federal Employee Financial Planning Podcast. If you like it, especially this one, please, please share this with your friends. You have the opportunity to be somebody's hero. Leave us five stars.
Check out the website, masonllc.net, register for our blog. It's our content written by the financial planners at Mason & Associates, specifically for our clients who are mainly federal employees.
Topics going forward, we have a whole list: servicesonline.opm.gov. We've got the OPM handbook. We have so many different things that we're going to cover in this podcast, but if there's something burning that you would like to hear, we'd love to hear from you at MasonFP — that's masonfp@masonllc.net. Send us an email with your burning questions, burning topics, we will hit that in a future episode.
Thank you for your service. Thank you for being a valued part and such a huge contributor for our country. We can't thank you enough for your service. And until next time, we will be back with the next episode of the Mason & Associates Federal Employee Financial Planning Podcast.
The topics discussed on this podcast represent our best understanding of federal benefits and are for informational and educational purposes only, and should not be construed as investment, financial planning, or other professional advice.
We encourage you to consult with the office of personnel management and one or more professional advisors before taking any action based on the information presented.