Many prospective federal retirees worry about the possibility of predeceasing their loved ones and how these loved ones would be provided for in this scenario. Taking care of those you love in the event of your death is a natural desire, and although no one wants to think about death, it’s certainly wise to have a plan in place.
One decision a federal employee has to make is whether or not to leave a survivor benefit to a spouse. A survivor benefit means that if a federal retiree dies prior to the spouse, this spouse will receive a portion of the federal retiree’s annuity.
Please note that there are several survivor benefit options, and choosing to leave a survivor benefit will result in a reduction to one’s annuity. However, the topic of survivor benefits often brings up the question, “Can I leave a survivor benefit to someone other than my current spouse?” The answer is…maybe. Let us unpack what this ambiguous answer means.
Leaving a Survivor Benefit to an Insurable Interest
Technically a federal retiree can decide to leave a survivor benefit to someone other than the current spouse if that individual has an insurable interest in the retiree. According to the retirement paperwork for FERS retirees, an insurable interest, “exists if the person named may reasonably expect to derive financial benefit from your continued life”.
A couple of examples are a former spouse or a disabled child. In some instances, it may even be possible that a court order would require a federal employee to leave the regular survivor annuity to a former spouse; in this instance, the current spouse may become the insurable interest.
How Much is Left to an Annuitant with an Insurable Interest?
An individual with an insurable interest may receive a survivor benefit; however, this will not be the same as the regular survivor benefit.
The survivor annuity for an insurable interest is calculated by subtracting a reduction based on the difference in age between the federal retiree and the age of the annuitant. The survivor annuity is then equal to the reduced annuity amount multiplied by 55%. The table below details the age-based reduction for various age ranges.
|Age of the Person Named in Relation to that of Retiring Employee||Reduction in Annuity of Retiring Employee|
|Older, same age, or less than 5 years younger||10%|
|5 but less than 10 years younger||15%|
|10 but less than 15 years younger||20%|
|15 but less than 20 years younger||25%|
|20 but less than 25 years younger||30%|
|25 but less than 30 years younger||35%|
|30 or more years younger||40%|
Let’s assume that Bill will receive a federal annuity when he retires and that Bill’s son, John, has an insurable interest in him. John is 24 years younger than his dad, and therefore his survivor annuity would equal the following.
(Bill’s pension – 30%) x 55% = John’s survivor benefit
Although leaving a survivor benefit to an insurable interest is possible, please note that it will come with reduction to the retiree’s pension. Even with the reduction to a pension, there may be certain instances where leaving a survivor benefit makes sense; however, other options — including private life insurance — may be worth looking into.
Disclosure: The information contained in these blogs should not be used in any actual transaction without the advice and guidance of a tax or financial professional who is familiar with all the relevant facts. The information contained here is general in nature and is not intended as legal, tax or investment advice. Furthermore, the information contained herein may not be applicable to or suitable for the individuals’ specific circumstances or needs and may require consideration of other matters. RBI is not a broker-dealer, investment advisory firm, insurance company, or agency and does not provide investment or insurance-related advice or recommendations. Brandon Christy, President of RBI, is also president of Christy Capital Management, Inc. (CCM), a registered investment advisor.