September Is Life Insurance Awareness Month: Federal  Employees Are Encouraged to Ask    Themselves Whether They Have Sufficient  Life Insurance Coverage

Since 2004, September has been designated as “life insurance awareness month” by the nonprofit organization Life Happens (https://lifehappens.org/). Life Happens is dedicated to helping consumers take personal financial responsibility through the ownership of life insurance and related products.

Federal employees are advised to ask themselves whether they are sufficiently insured with respect to their life insurance needs.  Employees should recognize the important role life insurance plays in a family’s financial security. Moreover, life insurance is the cornerstone of a sound financial plan. Among the reasons individuals buy life insurance are income protection for family members, paying off a large debt such as a mortgage, to help pay estate settlement costs including the cost of a funeral, and to help pay any estate and inheritance taxes.

This column reviews some of the choices that federal employees have when it comes to purchasing life insurance. These choices include individual life insurance versus group life insurance, term versus permanent (cash value) life insurance and determining how much life insurance protection they need.

Life Insurance Choices for Federal Employees

Federal employees have choices and options available to help them address their life insurance needs. Their first choice is to participate in the federal government’s group life insurance program, the Federal Employee Group Life Insurance (FEGLI) program.

FEGLI is a group-sponsored term life insurance plan. The federal government is the sponsor of FEGLI. Permanent employees are eligible to enroll in the FEGLI program. Federal employees also may have access to other group-sponsored life insurance programs. Some federal employees are members of professional organizations which offer their members access to a group life insurance plan sponsored by the professional organization. For example, federal employees who are CPAs may have access to a group life insurance policy sponsored through the American Institute of Certified Public Accountants (AICPA) of which these employees are members.

There are some advantages for an individual to enroll in a group-sponsored life insurance plan such as the FEGLI program. Perhaps one of the biggest advantages is the fact that there is usually guaranteed issue with no underwriting. For example, when a federal employee is first hired into employee, the employee is automatically enrolled in the FEGLI “basic insurance” (and has 60 days to enroll in the additional life insurance coverages offered through FEGLI)  and does not have to prove that he or she is insurable. In other words, the employee does not have to go through a medical exam, nor is the employee’s medical records checked.

But there are also some disadvantages associated with group-sponsored life insurance. The biggest disadvantage is that when an individual leaves the group, the individual loses access to the group life insurance policy and is no longer insured. For example, those federal employees who are resigning from federal service (not retiring from federal service) this year under the “deferred resignation program” (DRP) will lose their FEGLI life insurance coverage. Another disadvantage to an employer-sponsored group life insurance policy is that when the employer pays a portion of the premiums, that portion could be taxable and included in taxable wages on the employee’s annual W2 statement. Federal agencies pay a portion of the FEGLI program’s “basic insurance amount” premiums with the result that many employees pay federal income tax on some of their agency ‘s FEGLI premium contributions.

The other choice that federal employees have with respect to addressing their life insurance needs is to purchase an individual term life insurance policy. An individual term life insurance has several advantages including: (1) Affordable for many employees, especially if they apply for a term life insurance policy when they are in their 20’s and 30’s. For example, a 30-year-old could pay (depending on the employee’s health status) between $23 and $30 per month for $500,000 of term life insurance coverage lasting 20 years; (2) Once the policy is in effect, the policyowner/insured does not risk losing coverage if the policyowner/insured were to change jobs or get laid off; (3) The policy will remain in effect as long as the policyowner/insured pays the premiums; and (4) Term life insurance is especially appropriate for covering needs that will disappear over time such as the need to cover the amount needed  to paid off a mortgage should the homeowner die.

Individual term life insurance also has some disadvantages including: (1) Insurance premiums associated with annual renewable term life insurance increases as the policyowner/insured gets olde; (2) Insurance coverage will cease at the end of the term, or because as the premiums increase over the term of the policy, the premiums may be unaffordable for the policyowner/insured; and (3) A term life insurance policy does not offer any cash-value or paid-up insurance.

Another consideration for purchasing an individual term life insurance policy is that the policyowner/insured has to apply on his or her own and premium rates will depend on the policyowner/insured’s age, gender, health and other factors. The application process can be somewhat confusing to navigate. For that reason, individuals who are in need of term life insurance are advised to contact an independent life insurance broker. The broker can make it easier to compare and understand all of the options associated with individual term life insurance policies.