Ep #24: How Much Life Insurance Do You Need?

 You can spend. You can save. What is the right thing to do? Federal benefits, great savings plans too. You can save your own way, with help from Micah and Tammy. You can save your own way. Save your own way.

Micah Shilanski: Welcome back to the Plan Your Federal Retirement podcast. I’m your cohost Micah Shilanski. With me as usual is the amazing 

Tammy Flanagan. Tammy, how are you doing ma’am?

Tammy Flanagan: I’m doing great, Micah. I’m excited to talk about this topic is because it’s one that we get a lot of questions on at seminars and just when I deal with clients. Really interested to hear your take on it from a financial planners point of view. Then, I’ll fill in the details from the benefits side. I think it’s going to be an interesting little conversation we’re going to have today.

Micah Shilanski: I think it’s going to be great. We hear so many misnomers about life insurance and there’s some people out there that are in the financial business that thinks that life insurance is a one size fit all. You have a problem, boom, life insurance is your answer. That’s not quite the camp we live in.

Micah Shilanski: We want to dispel some of those myths, but also dispel some of the myths that are out there that we see Tammy, a lot of federal employees have about how life insurance works. How much do you need? How much do you not need? How long do you keep it? There’s a lot of things going in and we’ll jump into it.

Micah Shilanski: I think a lot of times almost federal employees make it a little more complicated than it needs to be. We can really simplify this equation when we’re looking at life insurance.

Tammy Flanagan: I also think sometimes they take the stance of set it and forget it, so they bought it when they were 35 and forgot about it until they’re 65. All of a sudden that becomes a very noticeable withholding from either a paycheck or a retirement check. We need to reevaluate from time to time.

Micah Shilanski: It’s not just important to set that pace and say, “Great, everything’s on autopilot.” Anytime we have a life-changing event, or anytime we haven’t looked at something in the last five, 10, 15 years, it might be great to resurrect that, dust the dust off of it, and let’s see if it really makes sense that you’re still in the same policy. You have the right insurance. Are you overpaying for it?

Micah Shilanski: As you’re going to see things change as we get older and you want to make sure you’re taking care of yourself and your loved ones.
Tammy Flanagan: Exactly. Things do change. Both your family changes and your needs for this type of insurance changes, life goes on too. There’s times too, when people don’t even really need life insurance.

Micah Shilanski: There’s a decent amount of that.
Tammy Flanagan: There’s a lot we can talk about here. We may have to make this a two-parter, who knows.

Micah Shilanski: Well, let’s jump into it. If you have questions and you have things that as we’re going through the state and we don’t answer a little bit on what you were thinking about, then shoot us an email. Email us at [email protected]. This is episode 24. You can put that in the subject line. We’d love to hear from you.

Micah Shilanski: We’re getting great comments in from you, from federal employees, which really helps Tammy and I create our content. Right now, this is a little bit of a dialogue, Tammy. I think about what we want to talk about, but what we’d love to chat about is what you want to hear about. When you email us, when you comment on these podcasts and tag us in it, then we know it’s interesting to you or not interesting.

Micah Shilanski: We can curtail this commentary, so it adds massive value to your retirement planning because that is why we are here.

Tammy Flanagan: That’s for sure, because that’s what we’re good at answering questions, to help people figure things out.

Micah Shilanski: Perfect. Well, let’s jump into this. One of the first things, Tammy, before we jumped into the weeds of a life insurance, and I promise for those of you who are listening, we’re going to try to make this somewhat entertaining, so don’t drop off just yet. As we talk about life insurance, we have a tendency to over-complicate this.

Micah Shilanski: I think life insurance is extremely simple. It’s actually one of the reasons I really like life insurance is it’s a simple question is, do you need it or do you not? It’s really the simplest as if you pass away are your loved ones taken care of? Do you have enough income? Do you have enough assets? Do you have enough things to make sure you can replace your checks or your retirement checks?

Micah Shilanski: If you do, then you don’t need life insurance. Now, if you don’t, if you pass away, and you’re the breadwinner or your 50% or whatever percentage of that income that’s coming to household, and now your spouse can’t take care of themselves, your loved ones aren’t in a good financial position, well then great, it’s simple. You need life insurance and let’s not over-complicate it more than that.

Tammy Flanagan: With FEGLI, I think most people know it does get more expensive as you get older. FEGLI is even hinting to you that, “Maybe you don’t need me anymore. Maybe this is time to reduce your coverage.” I think that’s a pretty subtle reminder as we age every five years, that price, especially if you’re carrying optional FEGLI, the price goes up.

Tammy Flanagan: We’ll talk about that too, because I think it’s important to know how to reevaluate what you have, make sure you don’t drop things that you still need, but be serious about it. The other thing too, Micah, I was thinking about this. This is the thing I was forgetting when we were talking earlier.

Tammy Flanagan: Sometimes, the money you’re spending on life insurance, maybe now, depending on what stage of life you’re at, could be switched over to spend on long-term care, because while you’re still living, those are needs that your family’s going to have to deal with too, if you should ever need care.

Tammy Flanagan: You may not need as much life insurance, but maybe that money you’re spending could be better put to use towards covering long-term care needs.

Micah Shilanski: Absolutely. Let’s jump into this. In that first question that we were talking about, which was, let’s not overcomplicate it. The second part of it is knowing what your cashflow is and Tammy, I know you and I chatting about this and we’ve always talked about it on every single podcast. That’s because I think cashflow is the heartbeat of retirement.

Micah Shilanski: How much a month do you spend? This is a really, really important question. Then if you pass away, how much is your spouse going to spend? Now, I jokingly say, when we’re doing seminars, I jokingly say, “Look, this is guy math. It’s very simple. If there’s two of us alive and right now, we spend $8,000 a month. That means when one of us dies. Now, we’re going to spend $4,000 a month. It’s cut in half. No, that is not how it works.

Tammy Flanagan: Well, that is how it works from the guy’s side, because if I die first, I could easily live on half of our income. I need three times our income if you die first.

Micah Shilanski: Knowing your spending again, really, really important to help answer this question.

Tammy Flanagan: By the way, it’s not always the wife who’s the spender. I have friends of mine who’s the husband’s the spender and the wife is the accountant conservative spender. It goes both ways, but got to figure that out too, because spending habits as well as saving habits are both equally as important.

Micah Shilanski: Very important because that is going to be the foundation for setting the next question is how much life insurance do you need? One of the things we’ll talk about as mid-career, and we’ll talk about retirement and really it’s the same formula, but your mid-career one of the things that if you pass away your spouses and your loved ones are losing, is your ability to earn an income, which is the greatest asset you have when we’re young.

Micah Shilanski: Your ability to earn an income, that’s how you build your TSP. It’s how you build your pension, that’s how you build your social security credits, and all of these other investments. Then all of a sudden when that ability goes away, because you pass away, how do you make your spouse whole? Well, that’s where that life insurance equation is going to come in.

Micah Shilanski: Generally, when we’re mid-career, early career, we have a larger life insurance need because we haven’t had time to save. We don’t have enough time to build up our TSP and other assets just yet.

Tammy Flanagan: That’s right. I think another thing that’s important for people to understand is even if you’re in your 30s or 40s, they’re still built in, I call them life insurance benefits. If a federal employee passes away, there’s a spousal survivor benefit. There’s a basic employee death benefit. There’s widow’s benefits from Social Security, if you have young children.

Tammy Flanagan: Figure out what those are first, because that’s in place, you didn’t elect that. It’s just there. Then once you figure out the value of those built-in benefits, then see what we need to add to that with life insurance, to make you whole, or at least to get you until you can start earning a living, or until you remarry.

Tammy Flanagan: There has to be a period of time, maybe cover the next five years. If my spouse dies when I’m 35, I’m not going to necessarily need this for the next 50 years, but at least for the next five years.

Micah Shilanski: That’s an important question. What income are you going to have coming in? This is almost the same at retirement time and not just the mid-career, is that if you go into retirement and great, you pass away in retirement, how much income is your spouse left with? Well, if you were taking out the maximum you could from your TSP, from your investments, and all of a sudden you died in your pension got cut in half because that’s the maximum survivor benefit is half.

Micah Shilanski: Then all of a sudden, instead of getting two Social Security checks, your spouse is only getting one, because they only get the higher of the two. What position are they put in? Do they have enough money to make sure they’re comfortable in retirement? Now again, if the answer’s yes, well then you don’t need life insurance and retirement.

Micah Shilanski: If the answer is no, that it’s not going to be enough income for them, then you need life insurance into retirement. Again, we keep coming back to this cash flow question. How much a month do you spend and where is that going to come from in retirement time?

Tammy Flanagan: I think that goes to there’s proof of that in a way, because if you look at the number of widows who live only on Social Security, why do you think that is? When there was two of us, we had a pension, we had savings, we had social security, like you said, two checks. Now, we’re down to one check. Those savings are going to get spent quicker, possibly.

Tammy Flanagan: That pension may have gone away. If there wasn’t a survivor benefit attached to it. Even if there was, like you said, with our federal pensions, the survivor benefits half, so half is not the same as whole.

Micah Shilanski: It’s half, but then you still have all the deductions that come out of there. You still got to pay for health insurance. You still have taxes. You might have long-term care. You might have all of these other things that are going to come out. How much is net? Really, really important to think about. Tammy, while we’re talking about that, then I want to jump on to that mortgage question that we get.

Micah Shilanski: Talking about the pension that’s there, I know my general rule of thumb, again, we’re not giving any investment advice, or any recommendations here. It’s just a theory, but my general rule of thumb is I always go into planning assuming we should leave a full survivor benefit to the spouse.

Micah Shilanski: The only time I deviate from that is maybe if they’re both federal employees, tandem federal employees, or dual federal employees with no kids. Now, we could broach a potential discussion about no survivor benefit, but I am a big fan of that first survivor benefit.

Tammy Flanagan: I think the other thing you got to remember is, let’s say there’s two of us and I leave you a survivor benefit, but then you die first. Well now, because I was leaving you the full survivor benefit, I get 10% added back into my retirement because I no longer have to pay for that. It’s almost to me like a built-in savings plan for the future.

Tammy Flanagan: Even if I become the surviving spouse and I’m providing that, I think it still can bump up my benefit enough to make it a little financially easier when that other spouse passes away.

Micah Shilanski: Knowing how your first benefit works, knowing how the survivor portion works. I know some people joke and say, “Well, I don’t really care because I’m dead.” Well, you know what, you have a family, you have a responsibilities even after you pass away, and you got to make sure they’re in a good place. Then looking at the social security checks as well. Like we talked, if you get two Social Security checks, one spouse passes away, you get the higher of the two, which is wonderful.

Micah Shilanski: Again, let’s say you had one spouse. That’s $2,000 a month coming in from a Social Security check. The other one has $1,500 monthly income, well, that’s great, you have $3,500 a month coming in, but then one spouse passes away. Now, you went from 3,500 to $2,000. You took was that a 40% reduction in Social Security income and it’s a massive reduction. How are you going to replace that?

Tammy Flanagan: That’s why I like the strategy of one spouse delaying their benefit until 70. You make that one spouse really top heavy because you know, that’s the benefit that’s going to pay out no matter if there’s two of you or one of you. The other spouse can start at 62, if they want to, because while there’s two of you, you still have that good solid income.

Tammy Flanagan: Then when there’s one of you, whoever survives gets the higher of the two. That’s a strategy I talk about a lot of times with my clients to consider that option.

Micah Shilanski: Now, if you want to know more about that option, you can visit our website because we did a special Social Security planning with Mary Beth Franklin. I believe that was episode 14. You can go to planyourfederalretirement.com/14. That’ll be the episode with Mary Beth. Again, she does a great job outlining a lot of details on Social Security. From my memory, we went into the strategy a bunch about delaying Social Security benefits.

Tammy Flanagan: That’s who I learned it from.

Micah Shilanski: She was great. She’s a wealth of knowledge.

Tammy Flanagan: Yeah, she is.

Micah Shilanski: Tammy, let’s pivot a little bit to some questions that I get. Then I want to get into different types of life insurance. How does FEGLI work and how does a bunch of other ones, but one of the other comments that I will get a lot when I’m presenting to federal employees is, “Micah, I don’t need life insurance or I have enough life insurance to pay off a house, so when I die, the house is paid off. Therefore I don’t need any more life insurance.” What are your thoughts on that?

Tammy Flanagan: That’s one piece of the puzzle, but I know in Virginia where I used to live, and even here in Florida, even if the house is paid off, you still got to pay property taxes. You still have to have insurance. You still have to buy groceries. You still have all these other expenses. Just because that one little piece of my expenses went away, doesn’t mean that I can live comfortably in the same house without any other money. Paying off the mortgage is not enough to justify canceling your life insurance.

Micah Shilanski: Let’s just make it simple. Let’s say you’re bringing home $5,000 a month in income. It doesn’t matter if it’s pre-retiree or retiree income, you’re bringing home $5,000 a month and the mortgage is $2,000. Well, great, you die and the mortgage is paid off. Well, now $2,000 of expenses goes away, but your spouse had $5,000 income. Well, $2,000 was the mortgage. They lost $3,000 a month.

Micah Shilanski: Where’s that money going? Now, if you’re listening to this, you’re saying, “That’s no big deal. My spouse could live on $3,000 a month or less.” Wonderful. I would like you to do a test for the rest of the year. Start doing allotment out of your pay, move $3,000 a month out of your pay to a bank account you don’t access and great. Let’s see May through December. Can you actually live on that $3,000 less?

Micah Shilanski: Now, if you’re freaking out in your mind, you’re like, “Oh my gosh, there’s no way I can do that.” Well then there’s probably no way your spouse is going to do that either. Again, what’s your plan for replacing that income?

Tammy Flanagan: I think we tend to just think simply from that standpoint, because I’ve had people come up to me and I remember one time in particular, this couple came up at a seminar and the husband was the employee. The wife was the spouse who is attending with him. He wanted me to convince his wife to waive the survivor benefit because he had a million dollar life insurance policy. I said, “That’s great. A million dollars. That’ll go a long way.”

Tammy Flanagan: I said, “You have whole life?” He goes, “Oh no, it’s term.” I said, “Well, what’s the term?” He says, “Well, that’s why it’s so cheap. I bought it when I was 40 it’s a 20-year level term.” I said, “Well, what happens when you’re 60?” He said, “Well, the house will be paid off. The kids will be out of the house by then. She won’t need the money anymore.” It’s like really? She looked at him like, “Is that your plan?”

Micah Shilanski: He’s going to be sleeping on the couch tonight. Sorry to hear that, but not a good plan.

Tammy Flanagan: She won’t be signing that waiver for the survivor benefit after hearing what I had to say. She didn’t know what questions to ask. She thought, “This is great. A million dollars does sound like a lot of money.” Especially today, I don’t know what it’s going to sound like 20 years from now. I doubt he’ll renew that million dollar policy when he’s 60, it would be way too expensive.

Micah Shilanski: It’d be super expensive. Tammy, let’s transition into that a little bit. Let’s talk about different types of insurance. Now, one of the things that you’ll find is as I’m working with clients, I’m not a huge life insurance fan. I really like it because it’s simple. I think you need it or you don’t, we don’t need to over-complicate it. When we get into these different types of life insurance, one of the things that I want to see this with is I think people sometimes have a misconception with life insurance.

Micah Shilanski: All of a sudden they blend life insurance and investing together and that can be a dangerous place. There could be an opportunity for that, but those are rare. Most of the time you really need to separate. This is my opinion, you need to separate those two things out. You buy life insurance for life insurance purposes, you get investments for investment purposes.

Micah Shilanski: When we combine them, sometimes it doesn’t work the way we think it is, or it’s a really good way to make an insurance company rich, which is not what I’m solving for.

Tammy Flanagan: I think I remember the day. I’m a lot older than most people listening probably, and definitely older than you, Micah. I remember the day I was sitting at my kitchen table with my mom and the insurance man came to the house. They used to do that back in those days and they’d come visit with their big briefcase and pull out their life insurance.

Tammy Flanagan: In those days nobody had a 401(k), nobody had a TSP. Insurance was really the only way to protect your spouse, life insurance. A lot of people had whole life or permanent insurance because there isn’t really only two kinds, there’s term and permanent.

Micah Shilanski: That’s right. There’s a lot of sub kinds inside of there, but you bet there’s those two big ones right. Term is what it sounds like. This is what I call your renting your life insurance. It’s good for a certain period of time, whether it’s one year at a time, all the way up to 30 year level term, if you have a policy for 30 years.

Micah Shilanski: Then it turns into a pumpkin. There’s some convertible options we can talk about, but it turns into a pumpkin when that term expires. If you don’t want renting your life insurance, if you don’t want that limited term, then you buy your life insurance. Then that’s called permanent insurance and permanent, there’s several different flavors of permanent insurance, it’s designed to last your entire life.

Tammy Flanagan: That’s the one that we hear of cash value to it, where some people will take the cash out of their life insurance. A lot of that is from another era. Don’t you agree, that that life insurance 30, 40 years ago is a whole different concept than the way federal employees would think about life insurance today. Don’t go by what your parents did.

Micah Shilanski: The times are different. Your tools are different. All of these things have changed and you need to look at it to solve, what is the best thing for you and your loved ones? With a lot of my clients, that’s buying term insurance when it’s needed. Whenever you buy life insurance, one of the things that I always suggest to my clients is when we’re buying term insurance and term is getting renting your insurance.

Micah Shilanski: What nice part about it is it’s cheap, it’s less expensive. I was suggested by a little too much life insurance for a little too long. One of the reasons I like that strategy is you can always cancel your insurance. Let’s say you think you’re going to need an insurance policy for 15, 16 years. It’ll get you through your retirement, then you think you’re going to be fine.

Micah Shilanski: Great. Go buy a 20-year term policy, because guess what happens if 16 years you’re not in the position you thought you were going to be in and that turns into a pumpkin. Well, great. Now I know I’ve got another four years of that life insurance. I got a little too long of insurance. Well, what’s the flip side of that? Well, maybe you get 10 years out. The investments are doing great.

Micah Shilanski: You’re financially independent. The house is paid off. You have enough assets saved that if you die, your spouse is taken care of. Awesome. Cancel the life insurance. There’s nothing that says you have to keep it for that entire period.

Tammy Flanagan: That’s right and that is your choice. I think another thing I like to remind people, especially like the example I had given earlier, there’s no spousal protection when it comes to life insurance. If I decide, I don’t want to pay for my life insurance anymore, I don’t need to get my husband’s permission to cancel it. I just tell the insurance company, “Drop my policy.”

Tammy Flanagan: I think there’s something to be said when you’re comparing this to survivor benefits, that there is spousal protection on a survivor benefit. That’s another little factor to keep in mind when you’re comparing products.

Micah Shilanski: Absolutely. Again, huge fan of survivor benefits for many reasons we’ve talked about. Another thing to think about is whenever you do an insurance policy, especially in retirement time, I like to have what they call a trusted contact put on the policy. Tammy, what a trusted contact is, and I know you know this, but for our listeners, it’s someone the insurance company can contact if something goes wrong with your policy.

Micah Shilanski: Let’s say, God forbid, but you get in that long-term care event. Now you’re in long-term care and your premium lapses, because you is set up for annual, you didn’t pay it because you’re in the hospital and insurance policies were lapsing, not because the insurance companies were being nefarious. People weren’t paying their premiums because they were in the hospitals, et cetera.

Micah Shilanski: Well, that’s not really the insurance company’s fault. They created a system called trusted contacts that you can put on all of your insurance policies, that if you get delinquent, something goes wrong, they can reach out to someone else to contact. Now, this is not your spouse because your spouse would already be with you. They’d already be checking the mail. They’d already be seeing these things in the home.

Micah Shilanski: This is someone else that would get notification that needs to say, “Micah, didn’t pay his life insurance premiums, are you sure that’s what he wanted?” Then they can start to remedy that.

Tammy Flanagan: I think that’s true of long-term care policies too. I’ve seen that with both the federal plan and private plans. A very good hint. Even if you don’t have that in your policy, tell somebody else you have it, maybe have them check on you from time to time. Especially, if you’re getting to the point where you’ve got chronic illnesses and medical conditions, that might put you in the hospital or skilled care facility for a couple of months at a time.

Micah Shilanski: That’s another reason I really encourage my clients with insurance to have monthly draft of insurance, not to pay annually. Yes, I know it’s slightly cheaper, but the risk that you could potentially run, if it’s not on autopilot. I really like it when it’s the insurance company’s responsibility to pay the premium. As long as you had that money in your account, you’re pretty much have a good claim for the policy should be in place.

Micah Shilanski: Even if you’re traveling, you’re out, something else, the insurance company gets paid. Automatic renewals, especially as we age, especially as we travel in retirement, so many things can go wrong. The more simplified you keep this, you’ll be proactive keeping that insurance in place.

Tammy Flanagan: That’s true. I agree wholeheartedly.

Micah Shilanski: We have term insurance, which is renting. We have permanent insurance, which could be whole life, universal life, variable universal life, all different blends of insurance that can be there. Tammy, the federal employees also have the FEGLI, Federal Employee Group Life Insurance . How does that work? What are some pros and cons?

Tammy Flanagan: Well, I’ll give you some pros of FEGLI because there are some benefits to FEGLI. Number one, when you’re first hired, maybe right out of high school or college, you get it. You don’t have to elect it. Every federal employee starts off with basic life insurance and by default, many people never cancel it so it floats with your salary throughout your career. Every time you get a pay raise, you get more life insurance.

Tammy Flanagan: As long as you’re a federal employee and you didn’t cancel it, you have that coverage. Moving that into retirement, you prepaid for some of the death benefit that you’ll keep free of charge when you’re over 65 and retired. There comes a time when FEGLI is free, not really free because you already paid for it throughout your career, but you get this amount that sometimes we refer to as a funeral benefit, or as a burial benefit.

Tammy Flanagan: What’s left of it when you’re 92 and you pass away, is generally enough to help put money towards the final expenses that you might have. The basic coverage does serve that purpose. I generally don’t recommend that people cancel it because it is something nice to keep in your back pocket, not that expensive. Now, the optional FEGLI, what’s nice about the pros of having Option B.

Tammy Flanagan: I’m not even going to talk about Option A, because I think option A is obsolete. It’s $10,000. It’s been around for 50 years. It’s never changed. It’s still $10,000. If you have that fine, if you don’t, I don’t care.

Micah Shilanski: I wouldn’t worry about it.

Tammy Flanagan: Option B is the one, that’s the multiples of your salary. A lot of folks carry five times their salary Option B, especially if they started a family or they bought a house, that’s when they really load up. That’s when you elect Option B coverage. What’s nice about that is when you have a life event, or when you’re first hired, you can elect as much of that up to five times, your salary as you want.

Tammy Flanagan: No one’s going to ask you what kind of health are you in? What pre-existing conditions do you have? Every federal employees entitled to max out their basic and optional coverage. There’s no medical underwriting. That’s great for someone who’s not insurable. The other thing with Option B and basic, and all of the FEGLI for that matter is they don’t care how you die.

Tammy Flanagan: I always ask the audience when I’m teaching a class, I’ll say, “What is the only time that FEGLI will not pay your beneficiary?” What do you think it is, Micah? Do you know?

Micah Shilanski: When you cancel your policy?
Tammy Flanagan: Well, that would be true, but let’s say you’re still paying for your life insurance and you died. What would be the only reason why your beneficiary would not get the death benefit?

Micah Shilanski: I don’t think I know it. I’m totally guessing, you die during a criminal activity.

Tammy Flanagan: You’re very, very close. It’s more specific than that. It’s if your beneficiary intentionally caused your death. In other words, somebody else murdered you they’ll still get paid, but if they’re the ones that cause of your death intentionally, not if it was accidental, that’s a whole different story. If they murdered you, basically. I like that clause, that’s a good thing to have.

Micah Shilanski: I didn’t know that.

Tammy Flanagan: They will pay for suicide, if in case anybody was wondering, because I get that all the time. People think they wouldn’t pay. Especially in federal law enforcement, unfortunately, that’s a fairly, not common, but it’s a recurring event that we see. They do pay for suicide, not that I would ever wish it on anybody or any family.

Micah Shilanski: The families that have to deal with it afterwards.

Tammy Flanagan: Anyway, so that’s the benefit of FEGLI. It floats with your salary, it’s available, whether you’re insurable or not, and they don’t care how you die. This is good for people who work overseas and war zones, and dangerous parts of the world, where sometimes the cause of death is an act of terrorism, an act of war, FEGLI pays.

Tammy Flanagan: In some private policies may have a clause, work exclusion or something like that. You got to watch for that, especially if you’re still an active employee to make sure that the policy you’re buying is really going to serve the purpose. In fact, I’ll tell you another little trivia piece about FEGLI is that FEGLI started in 1954, I believe it was. It had been around before that as a separate policy.

Tammy Flanagan: It was invented during World War II for federal employees who got called up to war, in case they didn’t come back, it would protect their families. It was meant in case they died as in the act of war.

Micah Shilanski: I had no idea. That’s really neat.

Tammy Flanagan: Little trivia.

Micah Shilanski: FEGLI serves a lot of great purposes, which is great. Here’s a couple of cons also on the other side of FEGLI. Again, we’re not picking on any federal benefits. We don’t do that, but everything has limitations and you need to know what those are when you’re doing your planning. FEGLI has a couple of limitations.

Micah Shilanski: One of them is you got to have it for five years prior to retirement, if you want to keep it into retirement. Now, they had an open season about five years ago, was it 2017 they had an open season?

Tammy Flanagan: Well, actually the open season was in September of 2016. Here’s the thing, whenever they hold the open seasons, the last couple were like this. You elect to max out your Option B coverage. I pick up five times my salary, I only had two times before. Well, they want you to be alive a year from now, before that coverage takes effect.

Tammy Flanagan: If you’re already diagnosed as a terminal illness patient, then you’re not going to get the benefit. Your family’s not going to benefit from it. The coverage in 2016 didn’t take effect for most federal employees that took effect October 1st of ’17. That coverage won’t be in effect for you until October 1st of 2022.

Micah Shilanski: If you retire before then, then there’s really no issue with that. Except for if you’re not going to be able to FEGLI into retirement.

Tammy Flanagan: The amount that you added. Right.

Micah Shilanski: Correct. You already had the basic and you already had let’s just say multiple of two, you could keep that. If you increase it to a multiple five for B, then you wouldn’t get that extra multiple of five, you would just go back to what you had in 2016.

Tammy Flanagan: That’s right. Then you’ll get someone who will say, “Well, wait a minute. That’s not fair because I’ve been paying for it for four years. Well, you didn’t die, so it served its purpose.” While you had it, it was working. It was there, in case you needed it. You never want to get your money’s worth out of insurance.

Tammy Flanagan: I hate to tell people that, but no matter what kind of insurance you don’t want to get your money’s worth out of fire, insurance, homeowners, insurance, car insurance, not even health insurance, because that means you’ve got an illness. That means something bad has happened.

Micah Shilanski: I always tell people, I say, “I really hope all the time we spend doing insurance planning and insurance premiums is a waste of time and money. That would be our best ideal outcome.” If it’s not, then we need to make sure we did really good to make sure you’re taken care of.

Tammy Flanagan: I always say you buy insurance because it’s covering a catastrophic event. If your death is not considered a catastrophic event, I don’t know really what it is. Especially, if you’re the breadwinner, like you were saying before. I think that’s when you really have to consider how much do you need if you’re raising a family, if you just bought a house.

Tammy Flanagan: If you’re married and your spouse is taking care of the kids at home, you got to make sure you’re protecting that family.

Micah Shilanski: With that, again, you have the five years, you’ve got to keep FEGLI before you move into retirement, which isn’t really a con it’s just got to know that, it’s just one of the rules. Then, the other con with FEGLI insurance is the premium. That premium is going to go up fairly substantially as we age. I’ll get my numbers slightly wrong here.

Micah Shilanski: Please don’t hold me exactly to this. Basically, when you turn 50, your premium goes up almost 50%. That’s when you really notice you had FEGLI insurance, then it’s in five-year age bands. Then at 55 it goes up another 50% plus. Now, your premiums double. Almost doubles.

Tammy Flanagan: It goes from 11 cents per thousand bi-weekly to 20 cents per thousand bi-weekly. It’s almost double.

Micah Shilanski: Then, it happens again at 60. Your premium goes up even more when you’re 60 years young.

Tammy Flanagan: More than double. If you were paying $100 out of your paycheck after you’re 60, you’re paying more than $200. I always tell people there’s a reminder built into FEGLI because you look at your paycheck and all of a sudden it got smaller, “Well, happy birthday. You just turned 50 or 55.”

Tammy Flanagan: When I worked in the personnel office, I’d have angry employees come in, waving their leave and earning statement saying, “Somebody made a mistake on my paycheck.” I’m like, “Well, happy birthday because you probably just had an increasing FEGLI.” Nine times out of 10, that was what had happened. The next thing they want to know is, “How do I drop it?”

Micah Shilanski: This is something you have to plan in advance. One of the things that I really encourage clients to do, we know when your birthday is going to be, that means we know when FEGLI is going to increase. Look at this in advance. If you know next year, you turn 50 great is FEGLI the best option for you or should you go look in the private sector for private insurance?

Micah Shilanski: Maybe term, maybe the permanent insurance, depending on your needs. I don’t know. As long as you’re healthy, I have not seen a case, if you’re healthy, that transitioning to the private sector is more expensive. It’s always equal to or less than what you’re currently paying for a really good term policy. It may be something you want to think about. Now, if it’s a borderline, let’s say it’s the same price.

Micah Shilanski: When you’re 50 years young to transition to the private sector, I’m going to tell clients to do it. Why? Well, two reasons, number one, because you’re doing it now, you’re going to forget in five years. We know you’re insurable today. If you’re healthy, you’re young, we can do it. Do that policy today because in five years, and we have stories out the wazoo of people that one year later, six months later, five years later, something traumatic happened in their life, and they’re now uninsurable.

Micah Shilanski: Which think they can keep FEGLI into retirement, but now they’re going to be paying so much more for that life insurance had they just moved on that private insurance policy. Something you really need to be looking at.

Tammy Flanagan: I always tell people too. I agree with you 100%. If you’re going to get that private policy, get it first, get the signed policy, know what it’s costing you. Go through the underwriting and then drop FEGLI. It doesn’t matter for a month you’re paying double premiums. I’d rather see somebody do that, than go based on a quote that they found on the internet.

Tammy Flanagan: After the underwriting, it’s actually not that price or they’re not going to get it because they’re not insurable. Always get the policy first because once you have FEGLI, you don’t lose it unless you cancel it. Once you cancel it, it can be hard to get it back.

Micah Shilanski: I always joke with clients, Tammy, when they sign their new policy and they get that in place. Now they’re double insured, we have FEGLI insurance plus the private one. I always look at the federal employees like, “Make sure you cook dinner tonight.”

Tammy Flanagan: For a couple of weeks, you’re going to be worth a lot of money.

Micah Shilanski: That’s right. That’s a really great point. All right, this, I know it has gone a little bit long talking about life insurance. I appreciate everyone bearing with us cause that’s a lot of great information. Tammy, let’s transition a little bit to some action items because it’s not just not about having great information. You got to take action with this great information to increase your odds of successful retirement.

Micah Shilanski: I’ll kick it off and go first, since this is talking about life insurance, the first thing I would encourage you to do, review what insurance you presently have. What policies do you have? Do you have an old policy, whole life policy that you got when you were 16 or 17 years old because your parents bought it for you? That’s time to pull that out and take a peek at it.

Micah Shilanski: What FEGLI do you really have? Not what you think you have, what do you really have? I always grabbed the alias your pay stub for that because we can see what’s coming out of your paycheck. Pull those policies together, find out what you really have for insurance.

Tammy Flanagan: I have two things to put on it, to do list. Number one, review your beneficiary because your beneficiary was when you were first hired, may not be the same person today. Even though we have good intentions when we get married or divorced to update that, sometimes we don’t. That’s one thing. Then the second thing I would put on a to-do list is to sit down and really understand what happens if you die?

Tammy Flanagan: What is going to happen with Social Security? What happens with your first retirement? What happens with your life insurance? Then you’ll know like how much income that’s going to leave your family.

Micah Shilanski: Really, really important. Then, the last thing we want to step back to is once you know that, how much insurance do you have? Where’s that going to come from? How much you spend? Then, it’s a question of how much insurance do you need? This is a simple math equation. Do not over-complicate it by saying, “Well, they shouldn’t need that much.”

Micah Shilanski: That’s when we start putting the shoulds in there, that’s a lot of emotions coming out. It’s just math. What are you spending? What do you have? How much is that gap? How much do you need to make up for? That’s when you need to start going and looking at the insurance.

Tammy Flanagan: For how long?

Micah Shilanski: Yes and for how long. Again, buy a little too much life insurance for a little too long, I have talked with plenty of people who are widows, who have come in and luckily, well they were not my clients, but they came in after somebody passed away and they didn’t have enough life insurance. You got to tell them, “Great, you get to work until your 70.”

Micah Shilanski: “But he left me. He said we’re always going to be rich and have all this money.” Well, it was $100,000 policy. It replaced nine months of his pay. It’s just not enough money.

Tammy Flanagan: It was a lot of money 20 years ago.

Micah Shilanski: It was a lot of money 20 years ago and it didn’t get updated. Really important to look at that.

Tammy Flanagan: Those are all great things, Micah. Things that I’d like to talk to with every client, because I think those are things we never liked to think about, but it’s always good to do. You’ll be glad you did as time goes on.

Micah Shilanski: Very much so. It’s all about action items. Make sure you take action on these things. Also, we would love your help to continue to grow the podcast. It has grown tremendously, which is amazing. We have over almost 5,000 downloads a month on our podcast. Thank you, our listeners and that’s because you’re sharing it.

Micah Shilanski: Please jump out, get out those iPhones, share the podcast with a coworker, with a friend. Until next time, happy planning.