If you die in retirement, what happens to your annuity? If you are unsure of the answer to this question, you have not yet achieved retirement readiness. To be truly ready to retire is not just a state of mind, but an awareness of the consequences of your retirement decisions. As you fill out paperwork, you will be faced with decisions that directly impact your annuity and health benefits. Take a moment to complete our retirement readiness quiz to see where you stand. If you’re unfamiliar with our first retirement readiness statement, click here for a quick refresher. To help walk through federal retiree’s survivor benefits options, let’s dig into our second retirement readiness statement.
Readiness Statement Number Two
Though our first readiness statement focused on aspects of how to calculate your pension, our second statement addresses what will happen to your pension should you pass away in retirement. The following information should lead you to say, I have considered my survivor benefits and life insurance options and have chosen the best route to ensure my pension for my spouse or family.
Survivor Benefits While Retired
The first feature to make note of is that survivor benefit options while employed are different from survivor benefit options in retirement. Since our discussion today will focus on survivor benefit options in retirement, click here for information on options while working. FERS retirees have three survivor annuity options:
- 50% Survivor Annuity – A federal retiree can choose to leave 50% of his or her annuity to the surviving spouse at a cost of 10% of the annuity.
- 25% Survivor Annuity – Retirees can elect to leave 25% of their pension to the surviving spouse at a cost of 5% of their annuity.
- No survivor annuity – Retirees can also choose to leave no survivor benefit. If you choose this benefit, your spouse will have to sign off on this.
For your surviving spouse to continue to be covered by your Federal Employees Health Benefits (FEHB) after your death, you must elect at least the minimum survivor benefit. Also, if your spouse passes away before you, all of the money paid for his or her survivor benefit over the years will be lost. After the death of your spouse, your annuity payment will be reverted to the full amount.
Survivor Annuity vs Life Insurance
The survivor annuity is a benefit paid for while living to provide for your family in case you die first. This sounds a lot like life insurance, doesn’t it? Since both life insurance and the survivor benefit can fulfill similar functions, here are some of the key similarities and differences between them.
Payment Options – Life insurance can be paid through either a lump sum or an annuity, but the survivor annuity is only paid in an annuity.
Flexibility and Control – Life insurance generally does have more coverage options and riders available. Besides choosing the 50% or 25% survivor annuity options, the survivor benefit does not allow for changes in coverage.
Changing beneficiaries – Life insurance allows changes to the beneficiary while the survivor benefit does not.
Cost – The cost for life insurance is based on an individual’s age and health. As referenced above, the cost for a survivor annuity is set at either 10% or 5% of your annuity.
Taxes – Life Insurance can have a tax-free death benefit; however, a portion of survivor annuity benefits are taxable.
Inflation Protection – Will inflation eat away at your benefits over time? Life insurance can have forms of inflation protection depending on the type of insurance. The survivor benefit does get cost-of-living adjustments; although these are not guaranteed.
FEHB Continuation – Life insurance does not have any correlation to FEHB continuation. If you choose at least the minimum survivor annuity, your spouse can continue FEHB after your death.
Now that you have some of the key points of survivor benefits, you should know what will happen with your annuity at the time of your death. There’s a lot to consider between survivor annuities, life insurance, and health coverage. We encourage you to speak with a financial professional about your retirement options and make the choice that best fits your financial situation. Then you can say, I have considered my survivor benefits and life insurance options, and have chosen the best route to ensure my pension for my spouse or family.