Financial Questions & Answers Part 3 – The Insurances
FEHB Coverage After Retirement and Qualifying Events
Let us move on to the next series of questions, which focus on insurance.
Jill asks: My husband and I are both federal employees, both over 50, each with at least 20 years of service. My husband has always carried the FEHB plan for our family. If I take VERA and retire, and later my husband is converted to Schedule F and fired, can I take over FEHB?
The answer is yes. If your husband is fired and loses FEHB coverage, that loss is considered a qualifying life event. A qualifying event allows you to adjust your health insurance coverage.
One qualifying event is when a dependent loses coverage. If your spouse was carrying the FEHB plan and loses that coverage, you are allowed to pick up FEHB on your own.
You may wonder whether this still applies if you are already retired. The answer is still yes. Retirement itself can be a qualifying event, provided you meet the five-year FEHB requirement.
In your case, even though FEHB was carried under your husband’s plan, that still counts toward the five-year rule. Being covered under your spouse’s FEHB satisfies the requirement. If your husband loses coverage due to termination, that becomes the qualifying event allowing you to enroll in FEHB on your own.
How Much Life Insurance Should a Retiree Carry?
Dan asks how much life insurance a retiree should carry into retirement and whether it should be FEGLI or private insurance.
Greg asks about annuity survivor benefit options, specifically choosing between no survivor benefit, a 25% benefit, or a 50% benefit. He plans to retire under VERA and wants to make the best decision for his spouse.
Most of my clients end up choosing the 25% survivor benefit. However, that decision is never based on guessing.
You do not guess about early death scenarios. You do not guess about whether your spouse can survive financially. These decisions must be tested and measured. That is the foundation of financial planning.
When I run the numbers and test different scenarios, most clients land on the 25% survivor option. That said, there are cases where I recommend zero survivor benefit and no FEGLI at all. There are also cases where I recommend the maximum survivor benefit and maximum FEGLI.
The real question is not which option is most common. The real question is whether you even need life insurance at all.
When Maximum Survivor Benefits Make Sense
Let me give you an example where maximum survivor benefits make sense.
One of my clients was recently diagnosed with a terminal illness and has a very limited life expectancy. This client and their spouse have plenty of money and assets, so income is not the issue.
Even so, I recommended the maximum survivor benefit and maximum FEGLI. Why? Because the client will only pay premiums for a short period of time, and their survivors will receive a large benefit. The return on what they pay versus what their survivors receive is extremely high.
This turns life insurance into a rate-of-return conversation. I look at premiums as an investment and measure the return on that investment.
If someone has a very short life expectancy, maximizing survivor benefits and FEGLI can produce an excellent financial outcome for survivors.
Age Gaps and Survivor Benefit Strategy
There are situations where I recommend the maximum survivor benefit but not FEGLI.
A common example is when the federal employee is significantly older than their spouse. Statistically, women live longer than men. If the husband is several years older than his wife, the odds are very high that the spouse will outlive him.
In that case, the survivor benefit is likely to pay out for many years, often returning not just all the money paid in but producing a strong return as well. In these scenarios, I often recommend the maximum survivor benefit without additional life insurance.
As a general guideline, if the spouse is six or more years younger, the maximum survivor benefit often makes sense.
When No Survivor Benefits or Life Insurance Are Needed
There are also situations where I recommend zero survivor benefit and no life insurance.
An obvious example is when the federal employee’s spouse has a terminal illness and is expected to pass away first. In that case, it does not make sense to pay for survivor benefits or life insurance for someone who is unlikely to survive you.
In those situations, life insurance is unnecessary.
The key point is this: you do not guess. You measure.
FEGLI Portability and Conversion After Leaving Federal Service
Sean asks how portability works with government life insurance and what happens if you leave federal service and want to keep your coverage.
When you leave federal service, you typically have a temporary continuation of FEGLI coverage for about 31 days. During that time, you can apply to convert your FEGLI from a group term policy into an individual whole life policy.
The advantage of this conversion is that there is no underwriting. The downside is that whole life insurance is expensive, often much more expensive than term insurance.
Why Whole Life Insurance Often Falls Short
Whole life insurance works by putting money into a policy that grows over time. When you pass away, that accumulated value is paid to your survivors.
That should sound familiar. It is very similar to how the TSP works. You contribute money, it grows over time, and it is eventually paid out.
The difference is the rate of return. Whole life insurance typically guarantees around 4% growth, but the internal rate of return is often lower than that. In contrast, long-term TSP investments, such as the C Fund, have historically delivered significantly higher returns over time.
At the end of the day, whole life insurance often amounts to self-insurance, where your own money is funding the benefit. While there are exceptions, for the vast majority of federal employees, whole life insurance is not the strategy of choice.
