Life insurance is one of the most important financial tools for protecting your family, and term life insurance is the simplest and most affordable type. Federal employees automatically have access to Federal Employees’ Group Life Insurance, known as FEGLI, but many discover that this coverage is not enough or becomes expensive as they age. This guide compares FEGLI and private term life insurance, explains how much coverage you need and shows you how to shop for the best rate.
What Is Term Life Insurance?
Term life insurance pays a tax-free death benefit to your beneficiaries if you die during a set period, called the term. Typical terms are 10, 15, 20 or 30 years. If you outlive the term, the policy ends and no benefit is paid, unless you purchased a return-of-premium option. Because there is no cash value, term insurance costs much less than whole life insurance, which makes it the preferred choice for most families who need large coverage at a low price.
How FEGLI Works
FEGLI offers Basic life insurance, plus optional coverage known as Option A (Standard), Option B (Additional) and Option C (Family). Basic coverage is generally equal to your annual salary rounded up plus a fixed amount, and the employee pays part of the cost through payroll deduction. Optional coverage costs more as you move into older age brackets, and it is priced in five-year age bands. Check the Office of Personnel Management website for the current premium tables and eligibility rules.
Advantages of FEGLI
- Automatic enrolment for Basic coverage without a medical exam in most cases.
- Payroll deduction makes payments simple.
- Coverage can continue after retirement if you meet the participation requirements, although premiums change.
Disadvantages of FEGLI
- Optional coverage becomes expensive after age 40, and especially after 55.
- Coverage amounts may be too low for young families with a mortgage and children.
- You cannot tailor the term, and some benefits reduce after retirement or at older ages.
How Private Term Life Insurance Compares
A private policy locks your premium for the entire term. A healthy 30-year-old non-smoker might pay about the cost of a few cups of coffee per month for a $500,000, 20-year term policy. Rates rise with age and health problems, so buying earlier saves money. Because private policies are portable, they stay with you if you leave federal service, which is valuable if you change careers.
How Much Coverage Do You Need?
A common rule of thumb is ten to fifteen times your annual income, but a better method is to add up your family’s needs:
- Income replacement: the number of years your family would need support.
- Debts: mortgage balance, car loans, credit cards and student loans.
- Future goals: college tuition for children, or a spouse’s retirement contributions.
- Final expenses: funeral costs and estate settlement.
- Subtract assets: savings, existing life insurance, and Thrift Savings Plan balance.
For example, a family with a $300,000 mortgage, two children and a $75,000 income may need $750,000 to $1,000,000 in coverage.
What Affects Your Premium?
- Age: the younger you are, the cheaper the premium.
- Health: insurers rate applicants from preferred plus to standard or substandard, based on health history, weight, blood pressure and cholesterol.
- Tobacco use: smokers typically pay two to three times more than non-smokers.
- Coverage and term length: longer terms and higher coverage cost more.
- Occupation and hobbies: dangerous jobs and activities such as aviation can raise rates.
- Family medical history: serious hereditary conditions can influence the rating.
Types of Term Policies
Level Term
The premium and benefit stay the same for the entire term. This is the most popular choice.
Decreasing Term
The benefit falls over time, which suits loan protection but costs less than level term.
Convertible Term
You can convert the policy to permanent coverage without a new medical exam, a valuable option if your health changes.
Return of Premium
You receive the premiums back if you outlive the term, but the premium is much higher. Compare it with investing the difference in a retirement account.
Smart Strategy: Laddering Policies
Instead of buying one large 30-year policy, you can combine several terms. For instance, a family could buy $500,000 for 30 years, $300,000 for 20 years and $200,000 for 10 years. As your children grow up and your mortgage shrinks, the coverage steps down with your needs, which can reduce total costs.
How to Buy Term Life Insurance
- Calculate your coverage and choose a term.
- Request quotes from at least three insurers or work with an independent agent who can compare multiple companies.
- Check the insurer’s financial strength rating from agencies such as AM Best.
- Complete the application honestly, including medical history.
- Take the medical exam if required, or choose a no-exam policy if you accept the higher cost.
- Name primary and contingent beneficiaries, and review them after major life events.
Common Mistakes
- Relying only on employer or FEGLI coverage.
- Buying whole life insurance when term would meet the need at far lower cost.
- Delaying until health issues raise premiums.
- Hiding a medical condition or smoking, which can lead to a denied claim.
- Failing to update beneficiaries after marriage, divorce or a birth.
Frequently Asked Questions
Is life insurance taxable?
Death benefits are generally income-tax-free for beneficiaries, but estate tax rules may apply for very large estates.
Can I have both FEGLI and private insurance?
Yes. Many federal employees keep basic FEGLI coverage and add a private term policy for the rest.
What happens when the term ends?
The coverage stops. You can renew at a much higher premium, convert the policy if allowed, or buy a new one if you remain insurable.
Final Thoughts
Term life insurance is a low-cost way to make sure your family can pay the bills, keep the house and pursue their goals if you are gone. Compare FEGLI with private options, buy enough coverage and shop around, since prices can vary widely. This article is for general information only and is not insurance or financial advice; speak with a licensed agent about your situation.