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Federal Employees News Digest : Sep 23, 2013
Many individuals terminate their life insurance policies when they are approaching retirement. But one reason that individuals may want to retain a portion of their life insurance policies is because of the accelerated death benefit (ADB) rider available in many life policies sold today, including the Federal Employees Group Life Insurance (FEGLI) program. This column discusses the ADB rider and what federal employees should know about the FEGLI program and the ADB rider. A life insurance policy ordinarily pays benefits to a beneficiary after a policy owner dies. Those benefits are accelerated if the benefits are paid directly to a chronically or terminally ill policy owner before he or she dies. Provisions for accelerated or "living" ben- efits may be included in a policy when purchased or attached as a rider. Certain medical conditions can trigger eligibility for living ben- efits, including: • Terminal illness with death expected within 24 months (FEGLI -- nine months); • Acute illness such as heart disease, which would result in a dras- tically reduced life span without extensive treatment; and • Long-term care needed because the insured cannot perform a number of daily living activities such as bathing, dressing or eating. The amount paid to a beneficiary from the life insurance proceeds at the death of the insured will be reduced by the amount received as an accelerated or living benefit. If the life insurance policy's entire face amount is paid as a living benefit, then no benefit is paid upon the death of the insured. A permanent individual life insurance policy of $25,000 or more usually provides an ADB rider, as do some term life policies. FEGLI provides an ADB rider as discussed below. The cost of the ADB rider may be included in the insurance premium or added to the policy premium for a small amount, usually a percentage of the base premium. Note that accelerated benefits do not replace long term-care insur- ance. Ideally, an individual will also own a long-term care insurance policy to prevent the insured from depleting their life insurance policy and other savings to pay for long-term care services. Accelerated benefits are paid in different ways---for example, monthly or in a lump sum. In most cases, accelerated benefits are not subject to federal income taxes. Under the Internal Revenue Code a terminally ill person---defined as a person having less than 24 months to live---will not have to pay taxes on accelerated bene- fits. A chronically ill person is usually exempt from paying taxes but may have to qualify for the exemption by being certified each year. Once an insurance company accepts and pays an accelerated death benefit claim, the insured need not return the money claimed nor pay taxes if the insured's health improves. Those individuals who bought a life insurance policy for someone else can claim and receive living benefits if the insured has been diagnosed as chroni- cally or terminally ill. The policy owner can claim and receive benefits on the insured's behalf. Federal employees, annuitants or compensation- ers who are enrolled in the FEGLI program, who are terminally ill, and have a documented medical prog- nosis showing a life expectancy of no more than nine months have access to accelerated or living benefits. Employees can choose a full or partial living benefit in multiples of $1,000 while annuitants and compensationers can elect only a full living benefit. A living benefit under FEGLI is equal to the "basic" life insur- ance amount, the employee's salary as shown on their SF 50 rounded up to the next $1,000 plus $2,000, plus any extra benefit for employees or compensationers under age 45. That amount would be in effect up to nine months after the date of the Office of Federal Employees Group Life Insurance (OFEGLI) receives a completed claim for living benefits. Once FEGLI living benefits are approved, they are paid out. Living benefit payments are reduced by 4.9 percent to make up for lost earnings to the FEGLI insurance fund due to the early pay- ment of benefits. Only the FEGLI "basic" life insurance is available for a living benefit. The OFEGLI cannot pay the FEGLI "optional" insur- ance---Option A (Standard) and Option B (Multiple of Salary)---as a living benefit. A living benefit election has no effect on an employee's, annuitant's, or compensationer's optional coverages. If a full living benefit is paid and the "basic" insurance ceases, an employee will continue to pay for the optional coverage. Employees who receive a partial living benefit and whose salaries subsequently increase will not receive an increase in their basic FEGLI coverage. Once the partial living benefit is paid, the amount of the remaining basic FEGLI is frozen. Since annuitants are eligible for a living benefit, those employees who have FEGLI coverage at the time of retirement and are eligible to continue their FEGLI coverage during retirement may want to consider retaining some of their FEGLI coverage in retirement in order to access the living benefit in retirement. The fact that a living benefit can be used to pay for a nursing home stay gives annuitants another means of paying for the increasing cost of long-term care. Edward A. Zurndorfer is a Certified Financial Planner and Enrolled Agent in Silver Spring, MD. He is also a registered representative with FSC Securities Corporation, branch address: 833 Bromley St. - Suite A, Silver Spring, MD 20902. Phone: (301) 681-1652. Securities offered through FSC Securities Corporation,member FINRA/SIPC. EZ Accounting and Financial Services and FSC are independent companies. Informed Investor Evaluating life insurance coverage and needs, Part III: Accelerated death benefit September 23, 2013 Vol. 63, No. 10 7 Visit us on the Internet at www.FederalDaily.com
Sep 16, 2013
Sep 30, 2013