It’s a topic that nobody likes to think about, much less talk about. It is, however, one of the most important aspects of any financial plan. That issue is our own mortality, and you can’t deal with it as it happens; you have to prepare ahead of time. That also includes making sure a spouse or loved one knows where to look for the benefits that are available. This article will focus on some of those benefits, as well as how to put an overall plan together. The list is not, however, all-inclusive, and your specific agency may have other programs to include.
Federal Employee Benefits
Current Employees vs. Retired Employees
Death benefits are treated somewhat differently for current employees and retirees. For employees, all survivor benefits are automatic. For retirees, they need to be elected at retirement. The only exception is for children’s benefits, which are automatic in all cases.
The longest lasting of the federal survivor benefits is the survivor annuity. This is automatic for employees, and can be elected as either a full (50% of retiree calculated annuity) or partial (25% of retiree calculated annuity) benefit for FERS retirees. CSRS retirees have many more options to choose from, up to 55%. Payment is made monthly, and is increased with COLA adjustments annually. A survivor annuity is also required for the surviving spouse to be eligible to maintain health insurance coverage under FEHB.
Survivor annuities are paid to surviving spouses of current employees automatically, and spouses of retirees if elected. To be considered a spouse, the marriage needs to have lasted at least nine months or have produced children. Payments can also be made to former spouses (OPM is required to follow valid state court orders) or another “insurable interest” if selected at retirement. Insurable interest elections require a health screening and have a sliding cost scale depending on the age of the beneficiary.
Survivor annuities are paid until the spouse dies, loses entitlement (former spouses), or re-marries before age 55 (unless the prior marriage lasted at least 30 years). A benefit for a new spouse can also be added after retirement for an additional cost, once they meet the nine month requirement. There are additional costs associated with providing any survivor annuities, and an in-depth planning review should take place before making any survivor annuity elections.
Lump Sum Payments
If no survivor annuity is payable to a current employee, either due to a lack of beneficiaries or insufficient time to earn the annuity (18 months for CSRS, 10 years for FERS), then that employee’s estate will receive a refund of all retirement contributions made. For retirees who did not select a survivor annuity, any unexpended retirement contributions would go back to their estate as well.
A designated beneficiary will also receive a prorated amount earned on either a final paycheck for an employee or the final annuity payment for a retiree.
Basic Employee Death Benefit
For current federal employees who die while in service, there is a basic employee death benefit paid to their survivors. That amount was $31,786.21 in 2014, and is indexed for inflation. In addition to that amount, they will also receive 50% of that employee’s final salary (or 50% of the high-3 salary if it is higher). The benefit can be taken as a lump sum or monthly installments over three years. The payment can also be transferred to an IRA if not needed.
Children of federal employees or retirees are also eligible for a survivor benefit. The last published monthly payment amount is $486 per child or $1,460 per family for children who have lost one parent. If both parents are deceased, the rates are $584 and $1,752. These amounts are payable until the child marries, dies, turns age 18, or turns 22 as long as they are a student.
Federal employee children’s benefits are reduced by the amount of any Social Security benefit payable. In most instances, the Social Security benefit will be higher and the employee benefit will not apply. The Social Security benefit ends at age 18, however, so it is possible that the employee benefit will be paid for several years after that if the child is in school.
The potential for the highest lump sum death benefit from the federal system is FEGLI. Depending on the benefits selected, that could include a Basic insurance amount of current salary (rounded up plus $2,000), the $10,000 Option A, and a salary multiple up to five for Option B. The Basic amount is also increased for younger employees. The cost for these various options will vary over time, and it is a worthwhile exercise to occasionally review the needed coverage to avoid overpaying.
At the death of an employee or retiree, FEGLI will pay out the amount selected to the designated beneficiaries. This all happens in a relatively short amount of time, provided everything is in good order. This payment is also tax free, as the premium payments were made with after tax dollars.
In addition to FEGLI, you may also have outside life insurance policies. Those could be another type of group insurance as a federal employee, or possibly either term or permanent insurance through another insurance company. The exact nature of any of these benefits will depend on the specific contract with the insurance company, but they can all fill a very important role in an overall plan if they are deemed necessary.
While it is not specifically a death benefit, the TSP becomes a very important part of an overall estate, and has some particular considerations for what is possible to do with it depending on who the beneficiaries are. A surviving spouse beneficiary may roll an inherited TSP balance into their own account if they are a federal employee (recommended). If not, they may maintain a beneficiary participant account still in TSP. All others must transfer the TSP out to an outside inherited IRA or take distributions directly.
Once in an inherited IRA, the beneficiaries can take the money all out within 5 years, or choose to “stretch” the payments and their associate income tax consequences out over their lifetime. This stretch option is very valuable, and is a consideration for a surviving spouse who chooses to remain with a TSP account. While they could select a stretch option for themselves, their next beneficiary would be unable to do so. With an inherited IRA, the subsequent beneficiary would be able to maintain the stretch option selected by the original beneficiary. This differentiation may not be important in all cases, but should be considered as decisions are being made.
Death in the Performance of Duty
If a federal employee dies due to an injury sustained in the performance of their job duties, the survivors are eligible for a portion of their final salary. Spouses and children can receive up to 75% of the employee’s final monthly pay, depending on how many children there are. Spouses alone receive 50%.
The death in the performance of duty payment cannot be paid along with a survivor annuity. In many cases, the annuity would be lower and is waived. The rules for continuing the death in the performance of duty payment are the same as for the survivor annuity.
In addition to the monthly payment, the employee’s family can receive $200 as reimbursement for the cost of terminating employment and up to $800 for funeral and burial expenses. There is also a possible payment of up to $10,000, payable at the discretion of the head of the federal agency involved.
Law Enforcement Officers
There are additional benefits that may be available to law enforcement officers who die while on the job. One primary example of this is the Public Safety Officer’s Benefit. The PSOB is available to all public safety officers without need for any sign-up or enrollment. The current benefit is $339,310, which is split between a spouse and children. If there aren’t a spouse or children, it goes to the officer’s parents. In order to receive the benefit, the officer must be serving in the line of duty and meet other basic requirements. The PSOB also pays out for permanent disability and offers educational assistance to children.
There are also other agencies and organizations that provide benefits to fallen safety officers. Agency HR departments should have the most up to date information on those particular programs.
Have Something In Place
The time after a loved one’s death is very emotional, and is unfortunately when very significant financial decisions may need to be made. Logical and rational decisions can be made much more easily if they have been discussed ahead of time and decided upon without the additional stress. Executors and beneficiaries should be aware of the general plan, as well as where to find all necessary contact information for all possible benefits. If there is an advisor who has helped with the planning, all interested parties should know who that person is to help facilitate the process.
Immediate Cash Flow
Cash flow immediately after a death can be very difficult, especially with the significant cost of a funeral, burial, etc. It is very important to have a plan to meet the short-term cash needs to help avoid an additional stress on top of an already challenging time. An emergency savings account can work very well here. Life insurance, TSP, etc. will all provide funds, just not necessarily quick enough for some more urgent needs. The ability to bridge that gap can help prevent financial stress from adding to the situation.
Many people know that they should have proper beneficiaries in place, but may not have given it a second look recently. It is usually a good idea to review at least yearly and whenever a change is needed. The updated details are very important, and can result in a much faster process. There was an example of a single federal employee who had his two sisters down as his FEGLI beneficiaries. Unfortunately, he put 100% for each of them, instead of 50%. It took almost a year and quite a bit of legal fees to get the courts to agree to his original wishes of an even split. Even if something seems obvious, the paperwork needs to be accurate down to the smallest detail.
In addition to the somewhat obvious FEGLI designation, beneficiaries are also needed for the last paycheck or annuity payment, the basic employee death benefit, and any survivor annuity or unused retirement contributions.
Considerations for the Survivors
Upon the death of a current or former federal employee, there are several changes and notifications that should take place to make sure that proper adjustments are made promptly. Those include, but are not limited to, the federal agency, OPM, FEHB, FEGLI, and possibly even the PSOB. Contacting each group sooner will prevent errors that will need to be undone down the road.
Updated Financial Plan
The time after a loved one’s passing is very difficult, but eventually plans need to be re-made again for the future. Once some time as passed and the healing process has begun, then the new planning should take place as well. It is also helpful if there is a trusted advisor that is familiar with the situation and the existing planning, to make the transition smoother.
Don’t Rush In
There may be many options presented to survivors, especially if there are significant insurance proceeds. It is very important to know that there is no rush to decide what to do with any potential funds. In fact, most decisions that are delayed for months or even years turn out to be better than those made on a short time frame under emotional turmoil.
Social Security is another federal program that may automatically provide benefits to survivors. Benefits could include spousal or widow benefits and children’s benefits. Strategies can vary greatly, however, and filing choices right away can affect your options and potential benefits down the road. The long-term plan should be considered, possibly with the assistance of someone who is familiar with the system, before implementing any strategy.
One of the primary goals of estate planning is to give you peace of mind that your survivors will be taken care of after you are gone. The planning process can be complicated, which is why it is important to go through it at a time when you can thoroughly explore all of your options. There should be a sense of urgency to get started if you haven’t yet, but then take enough time to do it properly. If you are uncomfortable with all of the planning yourself, seek out the necessary resources for assistance.