As a federal employee, understanding how private life insurance compares to the Federal Employees Group Life Insurance (FEGLI) program is essential, especially when planning for retirement. You may find that private life insurance can address specific needs, such as providing income replacement for your family in the event of your death or serving as a tax-efficient way to pass on wealth to your heirs. To make an informed decision, it’s important to familiarize yourself with the different types of life insurance policies available.
Term Life Insurance and FEGLI
Term life insurance, like FEGLI, offers guaranteed coverage for federal employees without requiring health exams or proof of insurability. FEGLI’s Basic plan is particularly attractive because it provides term life insurance at group rates, with the government covering one-third of the premiums. This type of policy pays out a death benefit during a specified term but doesn’t build cash value. Consequently, if your designated beneficiary predeceases you, the policy offers no financial return.
Permanent Life Insurance
Permanent life insurance, offered by private insurers, provides lifelong coverage while accumulating cash value that you can access. Unlike term life policies, if your beneficiary predeceases you, you can cancel the policy and recover the full cash value. Permanent life insurance is generally divided into two main types:
- Whole Life Insurance: Offers lifetime coverage and builds cash value, potentially earning dividends that increase both the death benefit and the accessible cash value.
- Universal Life Insurance: Provides lifetime coverage, builds cash value, and offers flexibility to adjust premium payments within certain limits. You can access the cash value for any purpose, including using it to cover premiums.
Tax Advantages of Permanent Life Insurance
Permanent life insurance policies also come with significant tax benefits. Withdrawals from the policy’s cash value are typically tax-free, provided they don’t exceed the total premiums paid. Additionally, the cash value grows tax-deferred, and when you pass away, the death benefit is generally not subject to income taxes for your beneficiaries.
Enhancing Your Retirement Plan
Beyond life insurance, other products, such as annuities or mortgage insurance, can complement your retirement strategy. Consulting with a financial professional, such as an FRC® trained advisor, can help you evaluate your options, identify gaps in coverage, and choose policies that align with your needs, offering both financial security and peace of mind.
