Assigning your FEGLI coverage to another party? Here’s when you might want to consider it, and what you should know before committing.
The Federal Employee Group Life Insurance (FEGLI) plan is group life insurance that is made available to all federal employees when they are first hired. Although automatically enrolled in FEGLI basic coverage, you can cancel within 60 days being hired, and even after that, can drop coverage at any point. Adding coverage after this 60-day window is another story. Only through a qualified life event, during a (rare) FEGLI open season, or by undergoing a physical examination and bunch of paperwork can additional FEGLI coverage be enrolled in.
The premiums for FEGLI are cheaper at younger ages, but can gradually grow pretty expensive – especially in retirement. This is a significant aspect to keep in mind when considering an assignment of FEGLI coverage to another person or persons, firm, or trust. While allowed, assignment entails forfeiting ownership of one’s life insurance policy while still continuing to pay premiums on said insurance. This ownership is surrendered completely and irrevocably once the life insurance has been assigned to a party other than its original owner.
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Once assigned, the policy’s beneficiaries are removed and the insurance goes to an entity other than the original owner, and that person or party becomes known as the “assignee.” Other than responsibility to pay premiums, the life insurance policy is now theirs in its entirety. The assignee can designate as many beneficiaries as desired, including themselves. The amount of coverage can no longer be changed by the original owner and all assignees and beneficiaries have to agree before any cancelation of coverage can occur. The assignee is also who designates the reduction of coverage in retirement, which can be costly to the retired fed. The premiums also come out of the original owner’s paycheck or pension deposit so stiffing the assignee is not an option.
FEGLI Basic coverage, standard optional coverage (FEGLI A), and additional optional coverage (FEGLI B) can all be assigned. Family optional coverage (FEGLI C) cannot because with that option, the purchaser of the policy is the beneficiary, not the covered individual. The family members who might be covered by option C are also unable to assign this optional life insurance.
When to Consider FEGLI Assignment
Although a policy can technically be assigned to any person, group, firm, or trust, there are only a few circumstances where it might be a good idea. The assignment of FEGLI coverage to an ex-spouse resultant from a court order during divorce proceedings is where the practice most commonly seen, but this should be avoided, if possible, by the federal employee or retiree with the FEGLI policy. It would not be a bad idea for the ex-spouse to pursue it, though. If a court order doesn’t mandate the assignment of FEGLI, it does not need to happen in a divorce. Should they retain ownership of FEGLI, the fed would be free to remove their ex-spouse as beneficiary.
The other situations where assigning FEGLI might be beneficial are for tax purposes and accelerated benefits. The tax advantages can be ambiguous, however. An experienced estate tax advisor should definitely be consulted before assigning FEGLI for this reason. Inheritance tax privileges could be available, but the IRS rules are not clear-cut for Federal taxes, and for state taxes, different states naturally have different rules. That being said, generally speaking, if the FEGLI policy was assigned to heirs at least three years before the time of death, the proceeds of benefits could be considered a gift and not part of the deceased’s estate. Although, the determination of life insurance proceeds as either a gift or piece of the estate is ultimately up to the IRS upon the day of death.
Should an owner of a FEGLI policy become diagnosed with a terminal illness, they might also want to consider assignment. In this case, the FEGLI coverage would be assigned to a viatical settlement firm that would, in exchange, disburse a portion of the death benefit to the ill individual. Before doing this, it is best to look into FEGLI living benefits first. But because living benefits that come directly from FEGLI require no more than a 9-month life expectancy, and are also only available from FEGLI Basic (and not A and B options), there are some circumstances where it is simply not an option.
Until Next Time,
**Written by Benjamin Derge, Financial Planner, ChFEBC℠ The information has been obtained from sources considered reliable but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Benjamin Derge and not necessarily those of RJFS or Raymond James. Links are being provided for information purposes only. Expressions of opinion are as of this date and are subject to change without notice. Raymond James is not affiliated with and does not endorse, authorize, or sponsor any of the listed websites or their respective sponsors.