For many of us, life insurance is an essential part of our risk management plan; this is especially true if we have dependents. Determining how much coverage you need will vary and is based on personal and financial circumstances, such as your family’s composition, the amount required for immediate expenses, and the amount of ongoing support you would like to leave for your family. As a Federal employee, you’re likely eligible for FEGLI coverage; however, it is worth noting that you must have the Basic coverage to enroll in any Optional policies (Read more about the FEGLI specifics here).
How To Calculate
There are a few ways to determine the amount of life insurance needed, but I prefer the “financial needs” approach. This method determines how much life insurance is necessary to provide for your dependent’s lump sum and ongoing needs. Here’s a breakdown:
Step 1:
Calculate expenses and debts, add the following:
- Add existing debts you want to be paid upon your death (mortgage, car loan, etc.).
- Add immediate expenses if you were to die today (funeral costs, short-term household expenses, etc.).
- Add the annual income your dependents will need (a rule of thumb is 70% of current living expenses) multiplied by the number of years you estimate your dependents will need support. Also, consider whether you will need to provide for your spouse after your children have become self-sufficient.
- Add any estimated future education costs for your children.
- Add the amount needed for an emergency fund (3-6 months of living expenses).
Note: If eligible, you should account for your FERS survivor benefit when determining your spouse’s required annual income. Since the benefit is based on your years of service, it will fluctuate throughout your career, but establishing a baseline will give you a better picture of your actual insurance shortfall if any.
The survivor annuity benefit is 50% of what your FERS pension would have been if you retired on the date of your death (Read here for specifics on calculating your FERS).
To be eligible, you must have completed at least 10 years of creditable service, 18 months of which must have been civilian service. Additionally, you must have been married for at least nine months (there are exceptions for accidental deaths, and if a child was born of the marriage).
Step 2:
From the total calculated in Step 1, subtract assets and other insurance:
- Subtract any liquid assets (savings, non-retirement investment accounts, etc.)
- If eligible, subtract Basic Employee Death Benefit, which is about $33,000 plus 50 percent of your final salary or high-3, if greater. To be eligible you must have 18 months of credible civilian service and have been married for 9 months (there are exceptions for accidental deaths, and if a child was born of the marriage).
- Subtract any current life insurance coverage (including your spouse’s employer-sponsored group policy if you’re covered)
- The result is the total coverage you need.
Step 3:
Determine whether you have an insurance shortfall.
Do you have the coverage indicated by the final number in Step 2? If not, you have an insurance shortfall and may want to consider increasing your life insurance. Keep in mind that the maximum FEGLI coverage is about six times your salary (or about seven times for individuals age 35 or under). If you have decided you need to increase your insurance coverage, you will likely need to undergo a physical examination to increase your FEGLI.
Final Thoughts
Determining the amount of insurance coverage right for you and your family will depend on many factors, including your family’s composition, immediate expenses, and support for your dependents. Additionally, you should reevaluate your life insurance needs periodically or when certain life events occur (birth of a child or marriage, etc.). This guide is meant to support your evaluation and shouldn’t be your only method of analysis. You should also review the OPM website and consult with your human resource personnel. If you have a complex need or want a professional opinion, you should consult with a qualified financial planner.