Survivor Benefits: Q&A

Last week's column on survivor benefits led to a series of questions and comments. This week, I'll try to address some of them.

Does there have to be at least a nominal monthly survivor benefit for the surviving spouse for that spouse to continue being covered under the retired spouse's federal health insurance benefit after that spouse dies? Is this the same whether the surviving spouse also was a federal employee?

If you are retiring or already retired and your spouse is dependent on you for health insurance, you need to consider choosing a spousal survivor annuity. That way, your nonfederal husband or wife can continue to be covered by the Federal Employee's Health Benefits Program in the event you die before them.

Under the Civil Service Retirement System, you have flexibility in choosing the size of the annuity -- it can be 55 percent of any amount from $1 up to your full retirement benefit. Under the Federal Employees Retirement System, you can choose a survivor benefit of either 50 percent or 25 percent of your basic retirement benefit. Your spouse is entitled to the maximum, so you must get your spouse's notarized consent to choose the partial benefit.

If your spouse is entitled to FEHBP coverage on the basis of his or her own federal employment, then a survivor annuity isn't necessary to continue coverage. If you die under self and family coverage, your spouse can continue coverage on the basis of their own federal employment.

If a retiree marries after retirement, the choice of a survivor benefit has to be made within two years of the marriage.

I am still working and don't yet qualify to retire. If I die before qualifying for retirement, does my wife only get to cash in the life insurance and my retirement contributions, or does she get a limited pension via survivor benefits?

Most employees don't want to ask this question, but it is an important one and the answer should provide you some peace of mind. Even though you've never chosen to provide a survivor benefit, there is a spousal survivor benefit payable upon the death of an employee. If you are covered by CSRS and have at least 18 months of service, your spouse is entitled to 55 percent of the retirement benefit you would receive if you were eligible to retire. If you're under FERS and have at least 10 years of service, your spouse is entitled to 50 percent of your basic retirement. The spouse also gets a lump-sum death benefit valued at 50 percent of your basic pay rate plus $28,093.53 (as of 2008).

In addition, your surviving spouse is eligible for other death benefits, including funds in your Thrift Savings Plan account, Federal Employees Group Life Insurance benefits and unpaid compensation.

Why are the charges deducted from a retiree's annuity to implement so-called full- and half- survivor annuities kept by the government when the designated survivor dies before the retiree? This seems to be a great inequity -- paying for a service that is never rendered -- that should be corrected by Congress at its earliest opportunity.

Think of it like life insurance. You have to pay premiums for such coverage, but if you are still alive when your policy runs out, you don't get the premiums back (if it was a term insurance policy). You simply stop paying the premiums. The premiums that you paid are used to pay someone else's death benefit. Insurance is usually something you really don't want to get your money's worth out of.

I will be retiring at 62 this December. I was considering keeping my basic life insurance coverage in lieu of the survivor benefit. It will cost $135 per month, which is $50 more per month than the survivor deduction, but my wife would get a lump sum of $63,000 instead of the $400 per month. From what I have read, that premium stays the same until I die. Has anyone else considered this option? Does it make sense?

Please show this to your spouse, since it will be her or his decision to waive the survivor annuity. From your example, it appears that you are under FERS and have a retirement benefit that is going to pay you around $850 per month. You are considering a reduced retirement of around $765 per month to provide a survivor benefit for your spouse. The benefit would be about $425 per month for the rest of your spouse's life (50 percent of your $850 benefit). The alternative you are suggesting is to choose no reduction of your basic Federal Employee's Group Life Insurance, which will cost you about $135 per month (until you turn 65, when it goes down by about $20 because the basic premium ends). The life insurance would pay a $63,000 lump sum.

Here are the reasons I would want the survivor benefit and not the insurance if I was your spouse:

• Suppose I receive $63,000 at age 70. If I'm able to invest it at 6 percent interest, and I want to make sure the money doesn't run out before I die (which could be in another 30 years), I could take out only about $200 per month.
• The survivor benefit is adjusted annually for inflation both before you die and after your spouse receives the benefit. But the insurance amount is not adjusted. After it is paid out, how the spouse invests the proceeds determines how long the money will last.
• The life insurance is more expensive than the survivor election.
• The survivor election reduces your taxable income. But you pay the life insurance premiums with after-tax dollars.

Tammy Flanagan is the senior benefits director for the National Institute of Transition Planning Inc., which conducts federal retirement planning workshops and seminars. She has spent 25 years helping federal employees take charge of their retirement by understanding their benefits.