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.
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:
| 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% |
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:
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:
55 percent of $37,400, or $20,570
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.
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