Understanding the Federal Employee Group Life Insurance Program, FEGLI (Part 2) by Edward A. Zurndorfer
Upon entering federal service as a full time or as a part-time permanent employee, an individual has the option of joining the federal government-sponsored group life insurance program, the Federal Employees Group Life Insurance (FEGLI) program. In the second of two columns explaining how FEGLI works including its cost, this column discusses how federal employees continue FEGLI coverage during their retirement and other features associated with FEGLI.
Eligibility for FEGLI Insurance as an Annuitant
When an employee retires from federal service either under CSRS or FERS, the employee is eligible to continue FEGLI life insurance throughout his or her retirement years if the retiring employee meets all of the following requirements: (1) the employee is eligible to retire and therefore will receive an immediate CSRS or FERS annuity; (2) the employee has been insured under FEGLI for at least the five years immediately before the starting date of the CSRS or FERS annuity, or the full period(s) of service during which the employee was eligible to be insured, if less than five years; (3) the employee was enrolled in FEGLI on the date of retirement; and (4) the employee did not convert the FEGLI insurance to an individual policy.
Post-age 65 Reductions in the Amount of BIA insurance
Those employees who retire from federal service and are eligible to continue their FEGLI “Basic” life insurance (the basic insurance amount or BIA which is the retiring employee’s SF 50 salary on the day of retirement, rounded up to the next $1,000 plus $2,000) must choose the amount of BIA they want to continue after age 65, or at retirement if an employee retires after age 65. The choices are 75 percent reduction, 50 percent reduction, and No Reduction. Note that FEGLI BIA insurance does not reduce when an employee reaches age 65 and continues in federal service. Whichever reduction (if selected) occurs at the later of age 65 or the date an employee retires.
How the 75 Percent Reduction Works
On the day of retirement, the retiring employee is insured with the BIA. If the employee retires before age 65, then the annuitant retains that same amount of BIA and pays the same FEGLI premium (32.5 cents per $1,000 of BIA coverage per month) the annuitant was paying as an employee until the annuitant becomes age 65. Upon reaching age 65 (or the month after retiring if the employee retires after age 65), the BIA reduces 2 percent of the BIA per month until the BIA reduces to 25 percent of the BIA original amount. This reduction process will take 37.5 months. Starting in the month the 2 percent reduction begins and continuing until the annuitant dies, the annuitant pays $0 in premiums for the FEGLI BIA coverage.
How the 50 Percent Reduction Works
With the 50 percent reduction option for BIA, the retiring employee’s BIA on the day of retirement is reduced by 1 percent of the original BIA per month starting the month after the retiree becomes age 65 (or the month after the employee retires if the employee retires after age 65) until it reaches 50 percent of the BIA on the day of retirement. This will take 50 months, or 4 years and 2 months to happen. Unlike the 75 percent reduction option, the 50 percent reduction is not free. The cost is $1.035 per $1,000 of coverage per month until age 65 (if the employee retires before age 65) and $0.71 per $1,000 of coverage per month starting the month after the annuitant becomes age 65 (or the month after the employee retires if the employee retires after age 65).
With the No Reduction of BIA option, there is no reduction to the amount of BIA on the day of retirement. The annuitant keeps the full BIA amount throughout retirement, but a significantly higher premium cost compared to the BIA cost as an employee. The cost for the No Reduction BIA is $2.455 per $1,000 of coverage per month until the annuitant becomes age 65 (if the employee retires before age 65) and $2.13 per $1,000 of coverage per month starting the month after the annuitant becomes age 65 (or the month after an employee retires if the employee retires after age 65).
FEGLI Option A, B and C Coverages in Retirement
Those retiring employees who are enrolled in FEGLI Option A (Standard) on the day of retirement and who choose to retain Option A in retirement will pay the same premium as employees pay at their same age. Upon reaching age 65 or the month after they retire if they retire after age 65, Option A coverage automatically reduces each month by 2 percent of the pre-retirement amount (2 percent of $10,000 or $200 per month) until it reaches $2,500. There is no premium cost for Option A starting it reduces and continuing when it reaches $2,500. This is automatic, as there is no reduction election to make at the time of retirement for Option A.
For FEGLI Options B (Multiple of Salary) and C (Family coverage), a retiring employee must choose how many of the Option B and C multiples the retiring employee wants to keep. A retiring employee may choose to have some, or all of those multiples reduced (“Full Reduction”) or not reduced (“No Reduction”) starting the month after age 65, or the month after an employee retires if the employee retires after age 65. This election is made at the time of retirement using Form SF2818. In addition, an employee who retires before age 65, the annuitant will receive a notice providing the annuitant a second opportunity to elect to keep the full original reduction election(s) made at retirement or change the election(s) by returning the notice to OPM at that time.
A “Full Reduction” election means that when an annuitant reaches age 65, or the month after an employee retires if the employee retires after age 65, each multiple starts reducing by 2 percent of the pre-retirement amount (the amount on the day the employee retires), until the amount has been reduced by 100 percent and the final value equals $0. Until the reduction starts, the annuitant pays the same premiums as active employees. The premiums depend on the annuitant’s age. When the reduction starts at age 65, or the month after an employee retires if the employee retires after age 65, premium withholdings stop and Options B and/or C become free.
If “No Reduction” is chosen, then Options B and/or C coverage will not reduce at all. After age 65, the annuitant will continue to pay the same premiums as active employees, appropriate to the annuitant’s age.
Designation of Beneficiary
A FEGLI enrollee should designate a beneficiary if the enrollee wants the FEGLI life insurance proceeds : (1) to be paid to a person, firm, organization, or other legal entity not listed in the order of precedence (see below); (2) to be paid in a different order than the order of precedence; or (3) to be paid to a trust the enrollee has established for minor children or someone else.
Completing a Designation of Beneficiary (Form SF 2823) is the preferred way for a FEGLI enrollee to make a designation of FEGLI benefits. Once completed and submitted, Form SF 2823 should be kept up-to-date and refiled in case personal circumstances change (divorce, death of designated beneficiary, etc.).
Order of Precedence
Upon the death of a FEGLI enrollee, the Office of FEGLI (OFEGLI) will pay the life insurance proceeds in a particular order, as set by law:
· If the enrollee assigned ownership (see below for a discussion of “assignment”) by filing an Assignment, Federal Employees Group Life Insurance (using Form RI 76-10), OFEGLI will pay benefits: First to the beneficiary(ies) designated by the assignee, if any and second to the assignee, if there is no such beneficiary(ies).
· If the enrollee did not assign ownership and there is a valid court order on file, OFEGLI will pay benefits in accordance with that court order.
· If the enrollee did not assign ownership and there is no valid court order on file, OFEGLI will pay benefits: (1) first to the beneficiary(ies) the enrollee designated via Form SF 2823; (2) if no such beneficiary(ies), to the enrollee’s widow or widower; (3) if neither (1) or (2), then to the enrollee’s child or children in equal shares and the descendants of any deceased children; (4) if not (1), (2), or (3), then to the enrollee’s parents in equal shares or the entire amount to the surviving parent; (5) if not (1), (2), (3), or (4), then to the court-appointed executor or administrator of the enrollees estate; and (6) if none of the above, then to the enrollee’s next of kin entitled under the laws of the state in which the enrollee lived.
Option C (Family) benefits are paid to the enrollee upon the death of the spouse or the eligible children.
FEGLI benefits must be paid in accordance with the terms of a valid court order, regardless of whether the FEGLI enrollee has actually completed a Designation of Beneficiary (Form SF 2823). The valid court order supersedes any of the enrollee’s prior designations, and the rest of the order of precedence, if the appropriate office receives a certified copy of the court order before the enrollee’s death. For employees, the appropriate office is the employee’s employing office. For annuitants, the appropriate office is OPM.
Assignment is the transfer of ownership of life insurance to another individual, corporation or trustee. The federal employee is still the insured person, but the employee no longer owns the insurance. Assignment is voluntary and irrevocable. One possible reason an employee would want to make an assignment of his or her FEGLI life insurance for the main purpose of removing the life insurance from his or her gross estate.
Upon making an assignment, the assignor (the employee) assigns the BIA, Option A and Option B (if the employee has them). The employee cannot assign dismemberment insurance, the Extra Benefit or Option C. An employee cannot make a partial assignment or assign only one type of insurance.
After making the assignment, the employee continues to pay the premiums from his or her salary or annuity check. If the assignee agrees to pay the premiums, then a separate arrangement must be made.
After making the assignment, the assignee has the right to: (1) cancel or reduce insurance; (2) change BIA post-age 65 reduction election to 75 percent reduction; (3) change Option B post-age 65 reduction from No Reduction to Full Reduction; (4) designate and change beneficiaries; (5) convert to an individual policy when FEGLI terminates; and (6) reassign the insurance.
The assignor still has the right to: (1) elect a post-age 65 reduction for BIA, Option B and Option C at the time of retirement; (2) elect more insurance if still an active employee; and (3) continue Option C if the assignor has it.
An assignment automatically cancels prior designations of beneficiary. Once an assignment becomes effective, only the assignee has the right to designate a beneficiary for the employee’s or annuitant’s FEGLI life insurance proceeds. Upon the death of the employee or annuitant, the life insurance proceeds are paid to the assignee’s beneficiary, then the benefits will be paid to the employee’s or annuitant’s beneficiary if the assignee has not designated a beneficiary. An assignment supersedes the order of precedence and a valid court order.
Living benefits are life insurance benefits paid to the employee or annuitant who is still living, rather than paid to a beneficiary or survivor upon the death of the employee or annuitant. An employee or annuitant who is insured under FEGLI can elect a living benefit if he or she is diagnosed as terminally ill with a life expectancy of nine months or less and has not assigned the life insurance.
Only BIA is available for a living benefit. Optional insurance cannot be paid as a living benefit. Employees can elect a full living benefit (all BIA or a partial living benefit expressed as multiples of $1,000). Annuitants can elect only a full living benefit.
Filing a Claim
If an employee with FEGLI coverage dies, then the employee’s claimant(s) for the death proceeds should notify the deceased’s employing office. The employing office will provide each claimant with a Claim for Death Benefits (Form FE-6). Each claimant must submit a separate claim form to the employing office or directly to the OFEGLI if instructed to do so by the employing office.
A deceased annuitant with FEGLI coverage must have claimants for the death proceeds notify OPM here
OPM will provide each claimant with a Claim for Death Benefits (Form FE-6). Each claimant must submit a separate claim form to OFEGLI.
Edward A. Zurndorfer is a Certified Financial Planner, 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 the employees of Serving Those Who Serve 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.