The boiling frog is a fable describing a frog being slowly boiled alive. All gore aside, the premise is that if a frog is put suddenly into boiling water, it will jump out.  However, if the frog is put in room temp water which is then brought to a boil slowly, the frog will not realize the danger until it’s too late. The story is often used as an analogy for the inability to notice threats that arise gradually, rather than suddenly.

This story of the boiling frog also illustrates an aspect of human psychology: we tend to accept things that creep up on us slowly but steadily, even when they take control of our lives. But one day we wake up and find ourselves in ‘boiling water.’

What does this have to do with Life insurance, FEGLI and Option B?  Quite a bit actually.  FEGLI and the steady unnoticed rise in cost of FEGLI is the ‘boiling frog’ of the federal employee benefits and I’ll explain why.

FEGLI, (short for Federal Employee Group Life Insurance program) provides group life insurance to all federal employees, regardless of your current health status.  The premiums are deducted from your paycheck automatically and upon being hired, anyone can participate without a health screening.  When you go through a life transition such as getting married or having kids, you can add more life insurance via FEGLI.  There is no open enrollment with without underwriting with FEGLI. The most recent open enrollment occurred in 2016.

FEGLI also provides options to choose various amounts of coverage and the more life insurance you add, the more you pay. As you age, the payroll deductions increase slightly annually with large price bumps every five years.  The incremental price increases (e.g., heat increases) may be tough to notice because no one really checks their paystubs, especially in comparison to other larger deductions such as FEHB premiums, TSP contributions, taxes, etc.

Lastly, the largest component of FEGLI is option B.  Option B allows additional insurance to be layered on the basic benefit as a multiple of your salary.  The most of you can add is 5X your salary.

FEGLI starts out as a really inexpensive option for an entry level, non-married healthy person in their 20’s.  However, by the time a person reaches their mid-30s, with larger incomes, families and insurance needs FEGLI stops becoming a bargain.  By the time someone reaches their 40’s the cost difference can be substantial.

The crucial FEGLI feature central to our ‘boiling frog’ analogy is that participation in FEGLI is guaranteed regardless of health. Insurance is typically underwritten, which is the process of classifying the risk to the insurance company and then pricing a policy accordingly. Think of car insurance.

If you’re a good driver, own a safe car and have no speeding tickets you will get a better rate than your neighbor who has three tickets for speeding, owns a rear wheeled drive Ford Mustang in snowy Michigan and has two accidents in the past year. It would be downright unfair and certainly not smart for you to use an insurance company that treats you and your neighbor as equals and makes you pay the same price.

Welcome to FEGLI.

This is exactly what happens and why the FEGLI is so expensive.  You could be a marathon runner, eat 100% organic and be in great shape but if you are the same age as your overweight, diabetic, smoking a pack of day coworker you will pay the exact same. For him, life insurance via FEGLI is a bargain.  For you, not at all.

As you approach 40 you may be paying 1.5-2X the price you pay could be paying for life insurance with any number of companies.  Still have FEGLI in your 50’s and that price differential approaches 3X as expensive as the private market.

Life insurance is a crucial for all families and I’m not advocating eliminating it. Far from it.  But if you’ve been overpaying for FEGLI for many years, you might already be a frog already in hot water.

For example, we recently helped a 50-year-old border patrolman with a wife and two kids.

Sadly, his FEGLI case was typical.  He had option B FEGLI (5x his salary) because he still needs the insurance. Has one kid in college, one going in 2 years.

He is currently paying FEGLI $200.00 a month which will go up each year.  He is also due for a large price increase at age 55 to $378.00/month! He thinks he needs the insurance of another 10 years. Therefore, we recommended a 10-year term coverage for the same amount he currently had with FEGLI with an A-rated insurance company at a Standard Plus health rating.  (not even the best health price since he was slightly overweight) His premium would immediately reduce to $85 a month and remain the same for 10 years.  Zero increases.

The cost savings alone for the first 5 years amounted to $12,000. His son is currently at Wayne State University and he pays almost that amount in tuition each year!

So…by doing a simple review of his FEGLI, he just saved a year of tuition. Yeah, it’s that simple.

Had he already been overpaying for FEGLI for years?  Of course.  FEGLI is after all the boiling frog for federal benefits.  He was still appreciative because we got him out of the hot water before it was too late.

In all sincerity, the best part of the planning was that we are able to reposition the found money to another financial need (college) while leaving him with the same exact amount of life insurance and protection. This found money allowed him to not reduce his TSP contribution rate (like he planned) to cover the costs of college for his younger son still 2 years away.  He was thus able maintain the current savings rate in his Thrift Savings Plan and keep him on track for retirement.

All from a quick insurance analysis.

The morale of the story is to not be a frog.  Take a look at your FEGLI premium and get some competitive prices and try not to gasp.  Life insurance has never been easier to buy so there is really no excuses. Insurance companies provide online applications, easier in-home medical exams and you don’t even have to deal with an agent if you don’t want to.

Not sure you want to go it alone?  We can help.  As financial advisors who are fiduciaries, we must always do what is the best interest of the client and promise no salesmanship and no strings attached.  Insurance agents, even the great ones, aren’t held to that same standard and can advise clients incorrectly.

Look at is this way, you might save some money and given today’s time and age; you can never be too careful with your cash, or your insurance.

 

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The Five Star Wealth Manager award, administered by Crescendo Business Services, LLC (dba Five Star Professional), is based on the following objective criteria: Credentialed as an investment advisory representative (IAR) or a registered investment adviser; Actively employed as a credentialed professional in the financial services industry for a minimum of five years; Favorable regulatory and complain history review; Fulfilled their firm review based on internal firm standards; Accepting new clients; One-year client retention rate; Five-year client retention rate; Non-institutionalized discretionary and/or non-discretionary client assets administered; Number of client households served; Educational and professional designations. Wealth managers do not pay a fee to be considered of awarded.


* Source: Pew Research Center
† Source: “Quantitative Analysis of Investor Behavior, 2014” Dalbar Inc. Most recent data available. An index is un-managed and one cannot invest directly into an index.

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