FEGLI Life Insurance: Is It Worth the Cost?

FEGLI Coverage in Detail

FEGLI Basic insurance provides a death benefit equal to your Basic Insurance Amount (BIA) to your designated beneficiary. Additionally, there is automatic Accidental Death and Dismemberment (AD&D) coverage at no extra cost: if your death is accidental, an additional amount equal to your BIA is paid (effectively doubling the payout). AD&D also covers loss of limbs or eyesight in specific circumstances.

The Extra Benefit: Free Coverage Under Age 45

The Extra Benefit is one of FEGLI's most valuable features for younger employees. If you die before age 45, your Basic insurance payout is multiplied by a factor based on your age: the multiplier is 2.0 for age 35 and under (doubling your BIA), decreasing by 0.1 each year until it reaches 1.0 at age 45. For example, a 35-year-old employee with a $104,000 BIA would have total Basic coverage of $208,000 at no additional premium. This Extra Benefit is automatically included—no election is needed.

FEGLI Assignment: An Irrevocable Decision

FEGLI allows you to irrevocably assign (transfer ownership of) your life insurance to another person, trust, or entity. Once assigned, only the assignee can cancel coverage, change beneficiaries, or elect living benefits. Assignment is permanent and cannot be undone. It is primarily used for estate planning purposes or to remove the insurance proceeds from your taxable estate. This is an advanced planning tool and should only be used after consulting with a financial or legal advisor.

FEGLI Into Retirement

You can continue FEGLI into retirement if you have been covered for the 5 years immediately before retirement (or the entire period of service if less than 5 years) and you do not cancel coverage at retirement. You have three reduction options at retirement for Basic coverage: 75% reduction (coverage reduces by 2% per month starting at age 65 until reaching 25% of pre-retirement BIA, then becomes free); 50% reduction (similar phasedown to 50%, with an additional premium); or no reduction (you keep full coverage but pay a premium for life). Most retirees elect the 75% reduction since it becomes free after age 65.

Living Benefits Option

If you are terminally ill (life expectancy of 9 months or less), you may elect to receive a living benefit—a lump-sum payment of your Basic insurance while still alive. You can elect a full or partial living benefit. The full living benefit terminates your Basic coverage entirely; a partial living benefit reduces your BIA accordingly. This option provides access to insurance proceeds for medical or personal expenses during a terminal illness.

When to Consider Dropping FEGLI

FEGLI Optional coverage may not be the best value for employees over 50. Option B rates increase substantially at each five-year age band. At age 50-54, Option B costs $0.102 per $1,000 biweekly; at 55-59 it jumps to $0.230; at 60-64 it reaches $0.470. A healthy 50-year-old could potentially get a 20-year private term policy with locked-in rates that are lower than FEGLI Option B's increasing rates. However, employees with health conditions may find FEGLI's guaranteed-issue (no underwriting) feature invaluable. Basic FEGLI, with its government subsidy, generally remains a good value at any age.

Comparing FEGLI to Private Insurance: A Practical Guide

The decision between FEGLI and private life insurance depends on several factors. FEGLI's key advantages are guaranteed issue (no medical underwriting during initial election period), portability into retirement, and the government subsidy for Basic coverage. Its disadvantages are age-banded Optional premiums that increase every 5 years and limited coverage amounts compared to some private policies.

A practical approach: keep FEGLI Basic (good value due to government subsidy), compare FEGLI Option B rates at your age band against private term quotes for your desired coverage amount, and consider private insurance if you can qualify for preferred or standard rates. Lock in private coverage while you are young and healthy, then evaluate whether to drop FEGLI Optional coverage. Many employees maintain a mix of FEGLI Basic plus a private term policy for the best overall value.

FEGLI and Estate Planning

FEGLI proceeds are paid to your designated beneficiary and are generally not subject to federal income tax. However, they may be included in your taxable estate for estate tax purposes if the total estate exceeds the applicable exemption amount. The OBBBA permanently set the estate tax exemption at approximately $13.99 million per individual (indexed for inflation). This means FEGLI proceeds are unlikely to trigger estate tax for most federal employees.

You can designate any person, trust, or entity as your FEGLI beneficiary by filing a Designation of Beneficiary form (SF 2823) with your agency. If no designation is on file, proceeds are paid in a statutory order of precedence: surviving spouse, then children in equal shares, then parents, then executor of the estate, then next of kin. Keeping your beneficiary designation current after major life events (marriage, divorce, birth of children) is essential.