A chance to save $650 million per year! The vast majority of active employees can obtain life insurance at far lower rates than what is available through FEGLI. The insurance industry has become much more competitive in recent years, yet working federal employees are not seeing savings. Group rates for a pool with an age distribution similar to the federal workforce should be approximately $150 per year per $100,000 of coverage. Yet, the combined employee and federal premiums for FEGLI are $585 for that same coverage, nearly four times the appropriate rate! With a workforce of 2 million, this translates to an annual overpayment of approximately $650 million! Employees are far better served seeking more competitive rates elsewhere.
Where does this money go? It appears the overpayment results from a subsidy from active workers to annuitants. Active employees, who typically seek life insurance benefits to manage the risk of lost income to their beneficiaries, are greatly underserved by the program. An average federal employee contributes $4 for $1 of benefit. Federal employees should be strongly discouraged from joining FEGLI as currently operated, and rather seek better rates elsewhere. With FEGLI, employees are overpaying and underinsured.
Given the great need for active employees to have adequate life insurance coverage during their wage-earning years, it would seem much more appropriate to develop a separate life insurance program for active federal employees. The employee and federal contributions can either be vastly reduced from current rates (saving $650M per year!) or the death benefit can be greatly increased. If current and retired employees are interested in a plan that can carry life insurance benefits into retirement, it may make sense to create a new whole life program.