When you retire, you’ll have the option of providing a survivor annuity for your beneficiaries (aka the Survivor Benefit). This benefit allows your spouse or someone with an insurable interest (depends on you financially) to receive a portion of your pension every month after you die. This is such an important decision for federal employees that you should understand your options and key considerations long before you make the election. Here are four points to consider when deciding which survivor option is right for you.
1. Understand The Options & Costs
As with most things, the FERS survivor benefit is no free lunch. Although the cost will likely not break your retirement plan, it can add up over time and should be considered. The three options and their price tag are as follows:
I. Full FERS Survivor Annuity: The name of this option is a bit deceiving because the benefit to your survivor is only 50% of your unreduced monthly pension. The cost of this election is 10% of your regular monthly FERS pension. And the 10% reduction will continue until you die, at which point your survivor will receive 50% of your pension.
II. Reduced FERS Survivor Annuity: This election will provide your survivor with 25% of your unreduced monthly pension. The cost of this election is 5% of your regular monthly FERS pension. And again, this reduction will continue until you die, at which point your survivor will receive 25% of your pension.
III. No FERS Survivor Annuity: Your third option is to select no survivor benefit. If you choose this option, your survivor will not receive any portion of your pension when you die. An important point to be aware of is that if you’re married, the law requires you to provide a full survivor annuity for your spouse unless they agree in notarized writing to a lesser amount or none.
Note: If you want to provide a survivor benefit to someone other than your spouse or former spouse, you must be in good health and not have retired under the FERS disability option. Assuming you meet those requirements, you can elect to provide an insurable interest survivor benefit. This election can cost significantly more than the spousal benefit and ranges from 10 % to 40 %. The cost is based on the difference between your age and the person you name as the beneficiary.
2. The Pension Max
Some Feds approaching retirement debate whether to provide a survivor annuity and take the reduction in their pension or purchase a large insurance policy with a smaller overall price tag. This strategy is often referred to as “Pension Maxing,” and several factors should be considered before deciding to take this approach.
I. Do you know when you’ll die? If the answer is no, then Pension Maxing involves the risk of outliving the “term” insurance policy you purchased and being forced to renew your term insurance at a far greater price. For example, term life insurance is much cheaper for insurable individuals (younger, good health, etc.). Once the 20-year policy you purchased at 57 ends, your spouse’s protection will disappear, and you’ll have to renew the insurance now at age 77 for a considerably higher price.
II. Another important consideration is that the survivor benefit is subject to cost-of-living adjustments. Whereas term life insurance has no such adjustments, the death benefit’s value will be the same regardless of how much inflation has increased.
III. The most significant disadvantage to the Pension Maxing strategy is that the FERS survivor benefit is a prerequisite for your beneficiaries to maintain their Federal Employees Health Benefits Program (FEHB) coverage. Meaning your spouse must be entitled to a survivor annuity (full or partial spousal election or an insurable interest election) to maintain FEHB in the event you predecease them.
3. Making Changes After Retirement
Life happens, and things change, but can you make changes to your survivor election? It depends on how long you’ve been retired. According to OPM, “If it is within 30 days of your first regular annuity payment,” so not your interim annuity payment, you can change your election. If, however, it has been more than 30 days after your first regular annuity payment but less than 18 months, you can only increase your survivor benefit. After 18 months, you may only make changes in the event of marriage/divorce or the survivor’s death. Hence, think hard and long about whether to provide a survivor benefit because your window to make changes is very small.
4. Federal Employees Health Benefits Program (FEHB) Coverage
This is such an important factor to consider that although I mentioned it before, it deserves its own bullet point. If you don’t provide a survivor annuity to your spouse, they will not be covered under your federal health insurance coverage when you die. You MUST select at least a reduced survivor annuity benefit for your spouse to be covered under FEHB after your death. Per OPM, “If you were enrolled in a self and family plan at the time of your death and a monthly survivor benefit is payable, then your spouse and eligible dependents can continue your health insurance. If a monthly benefit is not payable, your spouse and eligible family members will have a one-time opportunity to enroll in private health coverage with the insurance provider.”
As you approach retirement, you’ll have many important decisions to make, and deciding whether to provide a survivor benefit is among them. It can be challenging to balance a reduced retirement pension and provide for your spouse in the future. But the sooner you start to consider the unique factors in your life and the ones laid out in this article, the better off you’ll be. Remember that there is a cost to providing a survivor benefit and that it may not necessarily be more than an insurance policy in the long run. Also, a survivor benefit is required for your beneficiaries to continue your FEHB coverage, and you only have a small window to make any changes to your election. As always, if you need help putting your financial plan together, consult with a qualified financial planner.
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2023 Legislative Change Notice
The SECURE ACT 2.0 passed and impacted many of the articles on this website. While the articles were correct when written, it’s impossible to re-write every article. Please consult a qualified professional (i.e., CFP®, CPA, or attorney) before implementing any strategy.