A lot of our financial life is dictated by deadlines.
For federal employees, there are a few coming up that shouldn’t be ignored. One is a deadline involving long-term care insurance. But for now, I want to address the open season for life insurance, which is over at the end of this month. Even if you aren’t a federal employee, you should start thinking about your life-insurance choices when your open enrollment starts this fall.
Federal employees have until Sept. 30 to decide to add or make changes to the Federal Employees’ Group Life Insurance (FEGLI) program. During this open season, employees can apply for term life insurance for themselves and eligible family members without getting a medical exam or answering health questions.
It’s those last two points that are significant, says Barry Korb, a Maryland-based fee-only certified financial planner.
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“The removal of the medical underwriting requirement is particularly important for any employees who for health reasons have not been able to get needed life insurance for themselves or their family members,” Korb says. “It is the rare open season for FEGLI that offers you a way out of this quandary. This open season can be a godsend. You should act now.”
There are no regularly scheduled open seasons to elect, increase, or change coverage under FEGLI. The last one was in 2004.
In most cases, if you are a new federal employee, you’re automatically covered by basic term life insurance. The premiums are deducted from your paycheck unless you waive coverage. The government pays one-third of the coverage and the employee pays the remaining two-thirds. Employees of the U.S. Postal Service get the basic fully paid.
Basic coverage is based on a worker’s annual salary rounded up to the next $1,000, plus an additional $2,000. For example, an employee making $65,500 a year will have $68,000 of basic life insurance under FEGLI, Korb points out. In addition to basic coverage, an employee can elect to carry even more insurance.
There are other times when you can change your coverage. If you have a qualifying life event, such as marriage, divorce or the birth of a child, you can make changes. Or you can do it at any time by passing a physical exam.
Despite getting a subsidy for premiums, Korb recommends that federal employees shop around. But if you’re running out of time, get the federal coverage now and still shop around. You can always cancel if you find a better or cheaper policy, he said.
For anyone thinking about life insurance, keep in mind why you need it: to help take care of folks who depend on your income. Whether you are a federal employee or not, figure out how much life insurance you need to carry. One rule of thumb is to get enough insurance to cover 10 times your annual gross salary.
While rules of thumb are helpful, this one doesn’t take into account your entire financial situation, including debts and assets.
Bankrate.com provides an estimate of how much coverage you need based on your answers to a series of questions, the first of which is how much you think you'll need for your funeral.
Next you’re asked to estimate how many years going forward would your dependents – your spouse and/or children – need to survive without your income. As Bankrate.com puts, “Would your income need to be replaced until your children finish their education, or until your spouse retires, gets a job or dies?”
In its calculations, Bankrate.com assumes certain rates of return should your beneficiaries choose to invest the insurance money. And keep in mind that they wouldn’t want to risk investing money that they need in the short-term to pay bills, Korb said.
The reality is, we don’t know how much life insurance we'll need exactly because there are so many variables. But take some of the guesswork out by using the life insurance calculator at Bankrate.com, which, if nothing else, should initiate a good conversation with your family about what they'll need in the event of your death.