The Living Benefits Rider Available with the FEGLI Program

Understanding the Living Benefits Rider Available with the Federal Employees Group Life Insurance (FEGLI) Program

In 2003, the nonprofit organization Life Happens created and coordinated “Life Insurance Awareness Month (LIAM)” designating the month of September to remind the American people about the importance of life insurance for their financial security. LIAM is designed to educate individuals about life decisions with respect to their life insurance needs. To help mark the month of September as “Life Insurance Awareness Month,” the four FEDZONE columns during September 2023 are designed to assist federal employees understand their life insurance needs and the options for addressing those needs.

This week’s column discusses the “living benefits” rider that is available to employees enrolled in the Federal Employees Group Life Insurance (FEGLI) program. For those employees who own individual life insurance policies offered by private insurance companies offering life insurance, living benefits are called “accelerated death benefits.”

Living Benefits vs. Assignment to a Viatical Company

Living benefits payments come from the Federal Employees’ Life Insurance Fund, which is part of the US Treasury. Viatical settlement companies are private sector businesses which are not connected with the federal government. A viatical settlement is an exchange of cash for a life insurance policy owned by a terminally or a chronically ill person. Viatical settlements will be discussed in a future FEDZONE column.

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The amount of living benefits available and the requirements for receiving a living benefit payment are set forth in federal law. Viatical settlement companies set their own requirements and payment amounts. Any contract entered into between a federal employee with a viatical settlement company is a private agreement between the employee and the company.

Eligibility for Living Benefits

An employee, an annuitant, or a compensationer enrolled in the FEGLI program who has been diagnosed as terminally ill with a life expectancy of nine months or less, and who has not assigned his or her FEGLI insurance, is eligible to elect a living benefit and must apply for the living benefit. The Office of Federal Employees’ Group Life Insurance (OFEGLI) (who administers the FEGLI program) has to agree with the individual’s medical diagnosis in order to pay the living benefit.

An employee, annuitant or compensationer cannot apply in advance for a living benefit. The employee, annuitant or compensationer must be terminally ill at the time of application.

Amount of FEGLI Insurance Available for Living Benefits Election

Only the FEGLI Basic Insurance Amount (BIA) is available for payment as a living benefit. The BIA is an employee’s current salary (adjusted slightly upward) as shown on the employee’s current SF 50 (Notice of Personnel Action). Optional insurances: Option A (Standard) and Option B (Multiple of Salary) are not paid as a living benefit. Employees can elect either a full living benefit (all of an employee’s BIA) or a partial living benefit (a percentage of the employee’s BIA) which is expressed as a multiple of $1,000. Annuitants and compensationers can elect only a full living benefit which is their BIA.

Limit on Number of Living Benefits Elections

If an employee, annuitant or a compensationer elects a full living benefit, then the employee, annuitant or compensations has no BIA left. If an employee elects a partial living benefit, then the employee cannot later elect another living benefit from the remaining BIA.

Application Process for Living Benefits

An employee, annuitant or compensationer who wants to apply for a living benefit must contact the Office of Federal Employees’ Group Life Insurance (OFEGLI) at 1-800-633-4542. OFEGLI will send the employee, annuitant, or the compensationer Form FE-8 (Claim for Living Benefits). OFEGLI will also send a calculation sheet for the applicant to estimate the amount of BIA available. The amount available to be paid as a living benefit will be reduced by an amount representing lost earnings in the Employees Life Insurance Fund because of the early payment of benefits. The reduction amount is called an actuarial reduction.

Completing the Election

The applicant completes Part A of Form FE-8 and the applicant’s doctor completes Part B. The completed Form FE-8 must be mailed back to OFEGLI at:

OFEGLI / P.O. Box 6080 / Scranton, PA 18505-6080

Note that OFEGLI determines whether an applicant for living benefits qualifies for the benefit, not the applicant’s agency or OPM.

Living Benefits Approval

If OFEGLI approves of an applicant’s living benefits application the applicant will then receive a check, along with an Explanation of Benefits (Form FE-8C). The applicant can change his or her mind about electing a living benefit until the applicant cashes or deposits the check. The effective date of the living benefit is the date the applicant cashes or deposits the payment from OFEGLI.

If the applicant decides not to elect the living benefit, then the applicant should write “void” on the check and return it to OFEGLI. If the living benefit payment is not cashed before the applicant’s death, then the applicant’s Personal Representative or Executor must return the check to FEGLI. The applicant’s FEGLI beneficiaries may then file a claim for death benefits.

Living Benefits Disapproval

If the OFEGLI does not approve an applicant’s living benefit application, the applicant will be notified. There are no appeal rights. However, the applicant can provide OFEGLI with additional medical evidence to support the applicant’s claim or reapply if future circumstances warrant.

Effect of a Living Benefit Election

Post-election BIA. When an employee or a compensationer cashes or deposits the living benefit check the OFEGLI sends a copy of the Explanation of Benefits (Form FE-8C) to the employee’s or compensationer’s personnel and payroll offices. The Explanation of Benefits shows the effective date of the living benefit election and the amount of BIA insurance that remains, the “post-election” BIA. If a full living benefit was elected, the post-election BIA is $0. An employee’s or compensationer’s Personnel Office does not calculate the amount of an employee’s or compensationer’s post-elective BIA. This is done by the OFEGLI.
The post-election BIA never changes. The post-election BIA never changes after the effective date of the living benefits election. This is the case even if the employee’s or compensationer’s salary changes. The post-election BIA remains the same. The employee’s or compensationer’s premium also are based on the post-election BIA. Those employees or compensationers who are age 45 or older at the time of death will not have their post-election BIA adjusted by the age factor (1.1 – 2.0) used in computing benefits payable for employees or compensationers younger than age 45. The following example illustrates:

Example. Frank elects a partial living benefit of $75,000. His post-election BIA is $50,000 at age 40. Three months later Frank gets a government-wide pay increase and locality pay adjustment. Two months later Frank turns age 41. One month later Frank dies. At the time of death Frank’s BIA is $50,000. His government-wide pay increase and locality pay adjustment had no effect on his BIA since a post-election BIA never changes. Although Frank was age 41 at the time of death, the death benefit is computed based on age 40 since that was his age at the time of his living benefit election. His beneficiary(ies) would receive $75,000 (BIA of $50,000 times 1.5 which is the age factor for age 40).

Retirement Election for Post-65 Reductions

The BIA for an employee who elects a living benefit cannot change. If an employee or compensationer elected a partial living benefit and he or she qualifies to continue coverage into retirement, then he or she must elect “No Reduction” for the BIA on Form SF 2818, Continuation of Life Insurance Coverage. This is unless he or she decides to cancel or convert coverage. A change to a 75 percent reduction cannot be made at a later date.

A living benefits election has no effect on an annuitant’s or a compensationer’s election for Option B (Multiple of Salary) or Option C (Family Coverage).

Miscellaneous Provisions

Designations of beneficiary. A living benefit election has no effect on an employee’s, compensationer’s or annuitant’s designation of beneficiary.
Incorrect prognosis. If an employee, compensationer, or an annuitant elects a living benefit and lives longer than the expected nine months, then he or she does not have to repay the living benefit.
Tax treatment of living benefits. Living benefit payments are not subject to federal income tax. An employee, compensationer or annuitant should consult a tax advisor or their state tax department for specific information concerning state income tax laws.

Edward A. Zurndorfer is a CERTIFIED FINANCIAL PLANNER™ professional, Chartered Life Underwriter, Chartered Financial Consultant, Chartered Federal Employee Benefits Consultant, Certified Employees Benefits Specialist and IRS Enrolled Agent in Silver Spring, MD. Tax planning, Federal employee benefits, retirement and insurance consulting services offered through EZ Accounting and Financial Services, and EZ Federal Benefits Seminars, located at 833 Bromley Street - Suite A, Silver Spring, MD 20902-3019 and telephone number 301-681-1652. Raymond James is not affiliated with and does not endorse the opinions or services of Edward A. Zurndorfer or EZ Accounting and Financial Services. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.