FEGLI Program Participants Can Assign Their FEGLI Life Insurance

Breaking down what FEGLI assignment is and how it works.

This is the third of four FEDZONE columns during September that are being presented to help mark the month of September as “Life Insurance Awareness Month” (LIAM) as designated in 2003 by the nonprofit organization “Life Happens”. This column describes the option of assignment in which a life insurance owner transfer ownership of his or her life insurance policy to another individual or entity.

The Federal Employees Group Life Insurance (FEGLI)program allows federal employees and annuitants enrolled in FEGLI to assign their FEGLI insurance. In so doing, the employee or annuitant gives up ownership and control of their FEGLI Basic Insurance Amount (BIA), Option A (Standard) and Option B (Multiple of Salary) to someone else. Option C (Family Coverage) cannot be assigned. The employee may assign his or her FEGLI life insurance coverage to an individual, to a corporation, or to an irrevocable trust.

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A federal employee or annuitant can assign his or her FEGLI insurance by completing and submitting OPM Form RI 76-10 (Assignment Federal Employee Group Life Insurance) downloadable at www.opm.gov/forms. An employee’s or annuitant’s decision to assign his or her life insurance coverage is irrevocable; the employee or annuitant cannot cancel his or her assignment if he or she changes his or her mind.

How Does Assignment Affect a FEGLI Enrollee’s Rights?

When an employee or annuitant assigns his or her FEGLI insurance - the BIA, Option A and Option B (if enrolled) - the employee or an annuitant gives up:

The right to cancel the FEGLI insurance
The right to change beneficiaries
The right to convert to an individual whole life insurance policy when the FEGLI coverage terminates for any reason other than cancellation, and
The right to change the post-age 65 reduction schedule for the BIA after the insured makes the original election when he/she retired. If the insured chose shortly before retiring No Reduction or 50 percent reduction in the BIA, then the assignee can change to 75 percent reduction. Neither the insured nor the assignee can change an election of No Reduction to 50 percent reduction. If the insured chose Full Deduction, then the assignee cannot change it.

What Reductions Can an Employee Make to Their FEGLI Insurance When He or She Retires?

An employee has the right to make the election on how much FEGLI BIA and Option B coverage he or she wishes to retain after he/she is age 65 and is retired. This election is made when the employee retires. The retiring employee:

Can elect either 75 percent reduction, 50 percent reduction or No Reduction for the BIA (see Form SF 2818 (Continuation of Life Insurance as an Annuitant or Compensationer) for more information about these choices); or
Can elect Full Reduction or No Reduction for Option B. See Form SF 2818 for more information about these choices. Once retired, the employee now annuitant can change an election of Full Reduction to No Reduction.

What FEGLI Reductions Can the Assignee Make?

The assignee can change the employee’s BIA election to 75 percent reduction, if the retired employee did not make that election at the time he or she retired. The assignee can change the employee’s Option B election to Full Reduction, if the employee did not already elect Full Reduction.

Why Would an Employee or Annuitant Enrolled in the FEGLI Program BIA (and Option B in some cases) Want to Make an Assignment?

FEGLI enrollees in many situations assign their life insurance to comply with the requirements of a court order upon divorce, for estate and inheritance tax purposes, or to satisfy a debt. These three situations are discussed in more detail.

A court decree of divorce, annulment, legal separation, or the terms of a court-approved property settlement agreement relating to a court decree of divorce annulment or legal separation may direct the FEGLI enrollee to sign their FEGLI BIA and Option B life insurance to a specific person. This is unless the enrollee previously had assigned their FEGLI life insurance coverage. Note that a court decree or agreement will not serve as a formal FEGLI assignment. A FEGLI enrollee must still complete and submit to the OPM Form RI 76-10 (Assignment of Federal Employee’s Group Life Insurance).
A FEGLI enrollee may want to assign his or her FEGLI life insurance in order to minimize the possibility that his or her estate will not be subject to federal and/or state estate taxes. An estate tax is imposed on the value of a deceased individual’s estate at the time of his or her death. There is the federal estate tax in which individuals whose total estate exceeds the annual exemption ($12.92 million during 2023) will be subject to the federal estate tax. There are some states that impose a state estate tax on state residents. Several of these states have state estate tax exemption less than $3 million. What is included in an individual’s estate? Real estate, bank accounts, investments, retirement accounts such as the TSP (traditional and Roth) and IRAs (traditional and IRA) and life insurance policies. An employee or annuitant whose estate tax value is close to estate tax exemption may want to assign his or her FEGLI life insurance in order to remove the life insurance policy from his or her estate.
Using a collateral assignment to secure a loan. A collateral assignment of life insurance is a method of securing a loan from a lender by using a life insurance policy as collateral. An employee or an annuitant enrolled in FEGLI may need to take out a short-term loan for needed cash. Most loans are either secured or unsecured. While an unsecured loan does not require collateral, unsecured loans are not always the most affordable or available option to many loan seekers. A loan that is secured will be cheaper. However, securing a short-term loan is risky if the collateral for the loan is one’s home or car. A collateral assignment of a life insurance policy is a method of securing a loan. If the borrower dies before the loan is repaid, then the lender can collect the outstanding loan balance from the death benefit of the life insurance policy. Any remaining funds from the death benefit would then be disbursed to the policy’s designated beneficiaries. By using life insurance as collateral, a borrower may be able to take out a secured loan without putting his or her home or car/truck at risk.

Federal employees and annuitants who are contemplating an assignment of their FEGLI life insurance are cautioned that an assignment is irrevocable. It cannot be canceled. An employee or an annuitant should not make an assignment of FEGLI life insurance for a bank loan which the employee or annuitant intends to repay in full. Even though the employee or annuitant intends to and does repay the loan, the FEGLI life insurance assignment remains permanently in effect.

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.