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Survivor Benefit confusion: part one

Choosing a survivor benefit should be a very simple decision, but often it can be complicated.

Every federal employee who completes a FERS (or CSRS) retirement application (SF 3107 for FERS and SF 2801 for CSRS and CSRS Offset) must choose what kind of retirement they want under the “Annuity Election” section of the application. There are five options to pick from:

  1. A reduced annuity with maximum survivor annuity for my spouse (if you are married at retirement, this is the “default” election).
  2. A reduced annuity with a partial survivor annuity for my spouse.
  3. An annuity payable only during my lifetime.
  4. A reduced annuity with a survivor annuity for a person who has an “insurable interest in me.
  5. A reduced annuity with survivor annuity for my former spouse(s).

This can be a very simple decision, or it can be complicated by factors such as a spouse who has their own retirement or the possible use of life insurance in lieu of the survivor election. The two most common choices are:

  • If you are single at retirement and there is no one who is financially dependent on you, then, #3 is most likely going to work for you. With this election, there is no reduction to your retirement. When you die, your retirement “dies” with you.  If choose #3 and you marry later, then you will have two years to elect a survivor annuity for a future spouse.  
  • If you are married on the day of retirement, then #1 is generally going to work well. Remember that if you are married and don’t make this election, your spouse will be required to provide their notarized consent to either a partial or “no” survivor benefit election. While you and your spouse are both living, your retirement will be reduced by 10% (a little under 10% if you retire under CSRS or CSRS Offset). If you predecease your spouse, the benefit is equal to 50% of your unreduced annuity at the time of your death (55% if you are retiring under CSRS or CSRS Offset) and payable for the life of your surviving spouse. If your spouse is covered under your FEHB insurance plan, they can continue this coverage as well through the survivor annuity (a spouse who is a federal employee or annuitant may elect to transfer the FEHB coverage to their salary or annuity benefit). If your spouse precedes you, then you can notify OPM of your spouse’s passing and have your annuity restored to the unreduced amount.  

While the retiree is living, the potential survivor benefit (payable to the spouse, former spouse and/or insurable interest) receives the same COLA increases the annuitant receives. When a FERS retiree dies, if the retiree had received no COLA increases because he or she was under age 62, there is no increase in the survivor benefit since the date of retirement. On the effective date of the next COLA, if at least one year has passed since the deceased retiree's annuity commenced, the survivor annuity is increased by a full COLA. If less than one year has passed, the COLA is prorated based on the retiree's annuity commencing date.

Example:  Based on her length of service and high-three average salary, Judy has an unreduced FERS retirement of $40,000/year and is retiring at age 62.  Electing the maximum survivor annuity will reduce this by $4,000/year (10 % of $40,000) so that her gross annuity is now $36,000. As her gross annuity is adjusted by COLA, the spousal survivor annuity is increased as well.  Let’s say Judy has lived for 25 years and received an annual COLA of 3% each year so that her unreduced retirement is now $82,400. The survivor annuity will be $41,200/year (50% of $82,400) and her surviving spouse will continue to receive annual COLAs for the rest of their life. If her spouse dies first, her reduced retirement ($74,160/year) will be increased to the unreduced amount of $82,400 upon notification to OPM of your spouse’s death.

What about the other options?  

Partial Spousal Survivor Annuity

This option can work for a couple when the spouse of the annuitant doesn’t need the money provided by the CSRS or FERS retirement if the federal retiree dies first, but they need their health insurance to continue. The only way to continue FEHB coverage for a surviving spouse who is not entitled to FEHB coverage through their own federal employment or retirement is to provide a survivor benefit. Under FERS, the partial survivor benefit election will cause your retirement to be reduced by five% instead of ten%. If you die first, your spouse will receive 25% instead of 50 % of your unreduced FERS annuity (if your spouse is under age 60 at the time of your death, they may also be entitled to a FERS supplement).   

Insurable Interest Survivor Benefit Election

This is not a common election because this election results in a permanent reduction to your CSRS or FERS retirement based on the difference between your age and the person you are naming. For example, if you have three children and want to provide an insurable interest survivor annuity, the first problem is you would have to choose only one of your children since the benefit cannot be shared. Secondly, let’s say you choose your child who was born when you were 31 years old. This would cause a 40% reduction in your retirement benefit due to the age difference (see below). Upon your death, this child would be entitled only to 555 of the reduced benefit amount.  

One last thing, to make this election, you must provide medical documentation showing that you are in good health (insurable) at your own expense. According to OPM, "insurable interest" is an insurance term which applies to someone who would reasonably expect to derive financial benefit from your continued life. For survivor benefit election purposes, an insurable interest is presumed to exist if you name as beneficiary of the insurable interest, any of the following individuals:

  • Spouse;
  • blood or adopted relative closer than first cousins;
  • ex-spouse;
  • person to whom you are engaged to be married;
  • person with whom you are living in a relationship that would constitute a common-law marriage in a jurisdiction that recognizes common-law marriages.

If the person named is not one of the above, you should submit affidavits with your retirement application from one or more people with knowledge of the individual's insurable interest. The affidavits should state the relationship between you; the extent to which the person named is dependent on you; the reasons why the person named might reasonably expect to derive financial benefit from your continued life.

The reduction to provide an insurable interest benefit is computed as follows. If the person named is:

  • is older, the same age, or less than 5 years younger than the retiree, the reduction is 10%;
  • is 5 but less than 10 years younger than the retiree, the reduction is 15%;
  • is 10 but less than 15 years younger than the retiree, the reduction is 20%;
  • is 15 but less than 20 years younger than the retiree, the reduction is 25%;
  • is 20 but less than 25 years younger than the retiree, the reduction is 30%;
  • is 25 but less than 30 years younger than the retiree, the reduction is 35%; or
  • is 30 or more years younger than the retiree, the reduction is 40%.

The insurable interest automatically ends if the insurable interest dies, if you marry the insurable interest and elect to provide a spousal benefit, or if the named person is your spouse and you change your election to provide a spousal survivor benefit.

Reduced Annuity with Survivor Annuity for My Former Spouse(s)

You do not need to make this election if a court order provides a survivor annuity for your former spouse. OPM must honor the terms of the court order, except that a former spouse cannot receive a survivor annuity by court order unless:

  • The marriage lasted at least nine months;
  • If an employee dies in service, the employee must have at least 18 months of service subject to retirement deductions;
  • The former spouse has not remarried before reaching age 55.  This does not apply if you and your former spouse were married for 30 years or longer.

If your former spouse is not entitled to a survivor annuity by court order, the option to elect a survivor annuity is available at the time of retirement. If you are currently married, your spouse’s consent is required since anything elected for a former spouse using this option will limit the benefit payable to your current spouse. The maximum combined survivor benefits that can be selected for a former spouse(s) and current spouse is 50% of your FERS benefit or 55% of your CSRS or CSRS Offset benefit.

Protecting a Current Spouse When Survivor Benefits are Payable to a Former Spouse through a Court Order

If a court order provides a survivor annuity to your former spouse and you are remarried, you should make your election for your current spouse as if the court order didn’t exist. If your former spouse loses entitlement because of remarriage before 55 or death, then your current spouse would have the right to the maximum benefit elected. If the former spouse and your current spouse both survive you, OPM will honor the court order first and your current spouse would be eligible for any portion not ordered for the former spouse.  

You may also provide your current spouse with an “insurable interest” survivor election at retirement which would require that your spouse waive their right to the regular spousal benefit. This would require a reduction to your retirement to honor the court order and then a second reduction for the Insurable Interest election. If your former spouse dies first, you can change the insurable interest election back to a spousal benefit for your current spouse. If your spouse and your former spouse both survive you, then upon your death, OPM would honor the court order first and provide your current spouse with 55% of your reduced annuity.