Though this topic has been mentioned in another article, it deserves further discussion: should you elect “No Survivor Annuity” on your federal retirement application and use a permanent life insurance policy to provide for your survivor? Let’s look at the factors you need to consider before making a decision.
Your Survivor Loses Their FEHB Coverage When You Die
For your spouse to continue FEHB coverage in retirement when you pass away, you must elect a survivor annuity. Of course, electing a survivor annuity results in a reduction of your own monthly annuity. Considering the rising cost of healthcare, and the fact that Uncle Sam continues to pay a portion of the FEHB premium, this reality may be reason enough to elect a survivor annuity.
A Survivor Benefit Reduces Your Annuity
As a FERS participant you have two options for electing a survivor benefit. Your spouse can receive either 50% of your basic annuity or 25% of your basic annuity. However, the survivor annuity reduces the net amount of your monthly annuity throughout your retirement: a 10% reduction for the 50% survivor annuity or a 5% reduction for the 25% annuity.
“The question to ask yourself when you replace a survivor annuity with life insurance: how will inflation impact the proceeds of the policy when I pass away?”
The FERS Survivor Annuity Gets Cost-Of-Living Adjustments (COLAs)
To mitigate the loss of purchasing power when inflation spikes, a spouse receiving a survivor annuity is eligible for COLAs. The question to ask yourself before replacing a survivor annuity with life insurance: how will inflation impact the proceeds of the policy when I pass away? Since your spouse’s FEHB coverage is terminated upon your death when you do not elect a survivor annuity, how much will they pay to buy healthcare insurance?
Your Longevity Verses Your Survivor’s Longevity
Deciding to replace a FERS survivor annuity with life insurance greatly depends on the longevity of you and your spouse. When you crunch the numbers, if your survivor dies before you, money withheld from your FERS annuity for the survivor benefit is lost. With permanent life insurance, if your survivor pre-deceases you, you can change the beneficiary or cancel the policy and receive the cash value.
Other Factors To Consider Before You Decide
- The age difference between the federal retiree and their spouse
- Health history of the federal retiree and their spouse
- Other sources of income available to the surviving spouse
Replacing a FERS survivor annuity with life insurance is a permanent decision. Touch base with an FRC® trained advisor who understands your benefits and can help you analyze the pros and cons before you decide.
