Determine how much life insurance you need
The Federal Employees Group Life Insurance Program, established in 1954, is the largest group life insurance program in the world, covering more than 4 million federal employees and retirees, as well as many members of their family. But it wasn’t the first life insurance coverage offered to civilian federal employees. That honor goes to what was originally known as the War Agencies Employees Protective Association, which was established in 1943. FEGLI and WAEPA are still going strong.
This week, let’s take a look at what FEGLI and WAEPA have to offer, with the aim of helping you determine how much life insurance you need.
First, the basics: life insurance protects your loved ones in the event of your death. Term life insurance guarantees the payment of a certain death benefit if the covered person dies during a specified period. FEGLI and WAEPA are forms of term insurance. Permanent life insurance, on the other hand, never expires.
The coverage you need depends on several different factors. WAEPA offers this general formula: First, calculate your obligations: annual salary + mortgage balance + other debts + future needs. Then subtract any liquid assets such as savings, college funds, and survivor benefits you may receive. Keep in mind that if you don’t have dependents and you have enough liquid assets to cover your eventual expenses, you may not need much life insurance, or even cash. ‘none.
Consider a hypothetical example of a federal employee who dies. He is married with no children, is 53 years old and has been under the Federal Employees Retirement Plan for 20 years. His current salary is $80,000 a year. He has a current balance of $400,000 in the Thrift Savings Plan. Additionally, he has a balance of $200,000 on his mortgage and $20,000 remaining on a car loan. That means he may need enough life insurance to replace his $80,000 salary plus another $220,000.
His surviving spouse will receive:
- The $400,000 from the TSP.
- Social Security widowhood benefits based on the deceased’s income payable at $2,500 per month. This benefit is not available until the spouse turns 60, unless they are disabled or caring for a child under 16.
- A FERS lump sum death benefit of $37,055 plus $40,000 (the lump sum benefit and 50% of the employee’s final salary are payable to a surviving spouse if the deceased employee has at least 18 months of service).
- A FERS surviving spouse’s pension, calculated as 50% of the employee’s length of service x his average salary of the first three x 1%. To be eligible for this benefit, the employee must have 10 years of federal service, including a minimum of 5 years of civilian service. In this example, the survivor benefit would be calculated as 20 x $76,000 x 1% = $15,200 per year or $1,266 per month.
With all of these benefits, the surviving spouse’s recurring income would be $45,200 per year, or $3,767 per month. The mortgage and car loan could be paid off using the proceeds of a tax-free life insurance payment, leaving other lump sum benefits to be used for the surviving spouse’s future retirement savings or converted immediately in income.
This employee might want to have at least $220,000 of life insurance so his wife can use the tax-free money to pay off the mortgage and car loan balance and use the other FERS and TSP to provide an additional $10,000 per year in annual income. Remember that distributions from the traditional TSP balance and the FERS death benefit are taxable.