Should I get a survivor annuity or purchase life insurance? This is a question that many prospective retirees ask. Though no one can give a definitive answer to this question, there are several things that one should consider in making this important decision.
One reason employees consider replacing a survivor annuity with life insurance is that survivor benefits “pay off” only if the annuitant dies before the designated survivor. If the designated survivor dies first, the money that was withheld from the annuity to provide for the survivor benefit was spent for nothing. With life insurance, if the beneficiary dies before the policyholder, the policyholder can simply change the beneficiary.
When looking at considerations, health insurance should be considered first. If a retiree wants his/her spouse to be able to continue enrollment in the Federal Employees’ Health Benefit Program if the retiree die before the spouse, a survivor annuity must be elected. Given the cost of health insurance, this alone is enough to make most retirees choose some type of survivor annuity. Reduced survivor annuities can be elected under both CSRS and FERS. Health insurance availability, of course, is not a consideration if the retiree is part of a federal “couple” or in any other situation where the spouse is entitled to post-retirement health insurance in their own right.
Secondly, an analysis should be done of the pros and cons of life insurance versus a survivor annuity. For example:
- How long will the survivor live after the retiree dies? Though this is a wild card in retirement planning, educated guesses about life expectancy can be made.
- If there is a likelihood of the survivor living long after the death of the retiree, then it is likely that a survivor annuity would be the best choice. In a situation where the retiree lived 15 years and the spouse lived an additional 15 years, the amount of income derived from the survivor benefit would likely be much more than the amount that would have been derived from investing the death benefit and taking payments.
- f there were a lesser likelihood of the survivor living for a long time after the death of the retiree, perhaps a life insurance policy would make more sense. If the retiree lived 28 years and the survivor only lived another two years, the survivor would not even have recouped the amount of money that the deceased retiree had paid for the survivor annuity. The death benefit of life insurance, when invested at a reasonable rate, would provide a stream of income better than that which would have been provided by a survivor annuity.
If you are trying to determine how long the survivor might live after the retiree’s death, here are some considerations in attempting to determine the relative life expectancy of the parties.
- The difference in age between the retiree and his/her spouse.
- Gender differences; women tend to live longer than men.
- The health history of the retiree and spouse.
- The family longevity of the retiree’s and spouse’s families.
If life expectancy does not give a clear answer to the survivor annuity versus life insurance question, there are a few other things to consider:
- Other sources of income that will be available to the surviving spouse.
- If considering insurance:
- The rating of the insurance company; and
- The reliability of the agent.
If you decide on purchasing insurance, you should look at:
- What type of policy is it?
- What level of income would the death benefit produce if invested at a reasonable rate?
- What would the ravages of inflation do to the value of a death benefit?
Do be aware that not all insurance policies are created equal and be sure to ask as many questions as you need in order to fully understand the benefits of the policy you are considering.
As you can see, the answer to the question of survivor annuity versus life insurance depends on each individual’s situation. Retirees may wish to consult with a financial advisor when making this decision and other decisions that can affect their retirement income.
John Grobe’s latest book, The Answer Book on Your Federal Employee Benefits, has just been released by LRP Publications. Order your copy at shoplrp.com. Ask your human resources office to contact Federal Career Experts about pre-retirement training.