Understanding the FERS Insurable Interest Survivor Annuity Benefit

Ed Zurndorfer breaks down the FERS Insurable Interest Survivor Annuity Benefit for Federal Employees

A recent column discussed the Federal Employees Retirement System (FERS) spousal survivor annuity benefit. This column discusses a FERS insurable interest survivor annuity benefit, including what an insurable interest survivor annuity is, who is eligible for it, the cost for giving it, and why for most FERS employees it makes little financial sense to give an insurable survivor annuity benefit. At retirement, a FERS-covered employee who is in good health and who is applying for a non-disability retirement may elect to provide an insurable interest benefit to a current or former spouse or other beneficiary who has an “insurable interest” in the employee. “Insurable interest” is an insurance term that applies to a person who would benefit from the employee continuing to live.

Note the following:

(1) a retiring employee may name only one natural person as the named beneficiary of an insurable interest annuity. OPM will not accept the designation of contingent beneficiaries as an insurable interest and such a designation is void, and

(2) an insurable interest election cannot be made after a FERS employee retires from Federal service.

An insurable interest survivor annuity may be given to a current spouse. But in the case of a married retiring FERS employee, an insurable interest election may not be made on behalf of the current spouse unless the current spouse has consented to an election not to provide the current spouse with a regular current spousal survivor annuity.

If the retiring employee makes an insurable interest election, he or she is responsible for arranging and paying the costs of a current medical examination to show that he or she is in good health. A report of the medical examination – signed and dated by a licensed physician – should be attached to the application for retirement. OPM will contact the retiree if further information is required.

The FERS employee cannot retire under a disability retirement and elect an insurable interest survivor annuity.

An insurable interest is presumed to exist if the retiring employee names one of the following individuals for the insurable interest annuity: (1) the current spouse; (2) a blood or an adopted relative closer than a first cousin – son, daughter, brother, sister or parent; (3) a former spouse; (4) a person to whom the employee is engaged to be married; or (5) a person with whom the employee is living in a relationship that would constitute a common-law marriage in jurisdictions that recognize common-law marriages.

If a person named as an insurable interest survivor annuitant is not one of those listed above, then the employee must submit affidavits from one or more persons with personal knowledge of the named insured interest survivor annuitant’s insurable interest in the employee. The affidavit must set forth: (1) the relationship, if any, between the employee and the person named to receive the annuity; (2) the extent to which that person is dependent on the employee; and (3) the reasons why he or she might reasonably expect to derive financial benefit from the employee’s continued life. The affidavit should be attached to the retirement application.

Cost to Give an Insurable Interest Survivor Annuity Benefit and the Amount of the Benefit

The age difference between the retiring employee and designated insurable interest is a major factor in determining the cost to the annuitant for giving an insurable interest survivor annuity. This is unlike a FERS spousal survivor annuity in which the age difference between the retiring spouse and his or her spouse has no effect on the cost to give the spousal survivor annuity. In short, the greater the age difference between the retiring employee and the designated insurable interest, the greater the cost of giving the survivor annuity. The following table summarizes the cost of giving an insurable interest survivor annuity:

Cost of Giving a FERS Insurable Interest Survivor Annuity

Age difference between retiring employee & designated insurable interest Reduction in Starting FERS Gross Annuity of Retiring FERS Employee
Insurable interest is older, same age, or fewer than 5 yrs younger than retiring employee 10%
Between 5 and 9 years younger 15%
Between 10 and 14 years younger 20%
Between 15 and 19 years younger 25%
Between 20 and 24 years younger 30%
Between 25 and 29 years younger 35%
30 or more years younger 40%

Actual Survivor Annuity Benefit for an Insurable Interest

The actual survivor annuity benefit associated with an insurable interest survivor annuity is equal to:

55 percent of the deceased FERS annuity’s net FERS annuity

(FERS gross annuity at the time of death, less the survivor annuity cost)

The following two examples illustrate:

Example 1. Carlos, age 57 and a widower, retires from Federal service with 32 years of FERS service and a starting FERS gross annuity of $40,000. Carlos elects to give his son Paul, age 25, a FERS insurable interest survivor annuity. Below is the cost to Carlos, Carlos’ net annuity and the benefit to Pedro when Carlos dies:

  1. Cost: Since there is more than a 30 year age difference between Carlos and Paul (57 less 25 equals 32), Carlos’ cost for giving a survivor annuity to Paul is 40 percent of $40,000 (Carlos’ starting gross FERS annuity), or $16,000. The $16,000 cost never changes, even when Carlos’ FERS annuity starts receiving COLAs.
  2. Net FERS annuity for Carlos: Assuming no COLA, Carlos’ net FERS annuity equals $40,000 less $16,000 or $24,000. When Carlos becomes age 62, his FERS annuity will receive annual COLAs. The original $40,000 gross annuity will increase each year with COLAs but the original cost to give the insurable interest survivor annuity, $16,000, remains the same.
  3. Insurable Interest survivor annuity benefit: 55 percent of the deceased annuitant’s net FERS annuity. If, for example, Carlos were to die at age 60 with no COLAs, then Paul will receive:

55 percent of $24,000, or $13,200.

Example 2. Jan, age 62 and single, retires from Federal service with 30 years under FERS. Jan has a disabled sister, Tricia, who is age 56. Jan elects to give an insurable interest survivor annuity benefit to Tricia. Jan’s starting FERS gross annuity is $44,000. The cost to Jan, Jan’s net FERS annuity, and the benefit to Tricia when Jan dies is:

  1. Cost: Since there is a 6 year age difference between Jan and Tricia (62 less 56), Jan’s cost for giving a survivor annuity to Tricia is 15 percent of $44,000 (Jan’s starting gross FERS annuity) or $6,600. The $6,600 cost never changes, even when Jan’s FERS annuity receives COLAs.
  2. Net FERS annuity for Jan.: Jan’s first-year net FERS annuity equals $44,000 less $6,600, or $37,400. Since Jan is 62, starting the January after she retires, Jan is eligible for COLAs to her FERS annuity. The original $44,000 gross annuity will increase each year with COLAs but the original cost to give the insurable interest survivor annuity of $6,600 remains the same.
  3. Insurable interest survivor annuity benefit: 55 percent of the deceased annuitant’s net FERS annuity. If Jan were to die during the first year of her retirement when her FERS gross annuity is $44,000, then Tricia will receive:

55 percent of $37,400, or $20,570

Is the Benefit of an Insurable Interest Survivor Annuity Really Worth the Cost to a FERS Annuitant?

As can be seen, by the two examples, a FERS annuitant pays a high price in order to give an insurable interest survivor annuity; namely, a significant decrease to the annuitant’s gross annuity in order to give a survivor annuity to the insurable interest. The insurable interest receives 55 percent of the net annuity – the deceased annuitant’s gross annuity at the time of his or her death, less the cost of the insurable interest survivor annuity.

This is not the case with respect to a spousal survivor annuity in which: (1) the cost to give the maximum spousal survivor annuity (50 percent) benefit is 10 percent of the retiring FERS employee’s starting gross (not the net) annuity. This is true no matter the age difference between the retiring employee and spouse; and (2) upon the FERS annuitant’s death, the surviving spouse receives either 50 percent (maximum) or 25 percent (less than maximum) of the deceased annuitant’s gross (not net) annuity at the time of his or her death.

A FERS employee would do better by not electing a survivor annuity benefit for an insurable interest. Instead, the employee should consider naming the insurable interest as a beneficiary of his or her TSP account, FEGLI life insurance and/or FERS contributions. In so doing, the FERS employee would not have any reduction in his or her own annuity, and the employee can name any number of beneficiaries for the TSP, FEGLI and FERS contributions benefits.

Written by Edward Zurndorfer, who is a Certified Financial Planner™, Chartered Financial Consultant, Chartered Life Underwriter, Certified Employee Benefits Specialist and Enrolled Agent in Silver Spring, MD. He is the owner of EZ Accounting and Financial Services, an accounting, tax preparation, and financial planning firm also located in Silver Spring, MD. He is a seminar speaker at Federal employee retirement seminars throughout the country for the National Institute of Transition Planning, Inc. He is also a weekly columnist for MyFederalRetirement.com. Raymond James is not affiliated with and does not endorse the opinions or services of FEDZONE or Edward A. Zurndorfer or any of the above-listed organizations. The information has been obtained from sources considered reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Edward A. Zurndorfer, and not necessarily those of RJFS or Raymond James. Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize, or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website’s users and/or members. Raymond James does not offer tax or legal services. You should discuss tax or legal matters with the appropriate professional. Securities offered through Raymond James Financial Services, Inc., Member FINRA/SIPC. Investment advisory services offered through Raymond James Financial Services Advisors, Inc. Serving Those Who Serve is not a registered broker/dealer and is independent of Raymond James Financial Services