Your federal health insurance is a major consideration when choosing what kind of death benefits you’ll need to have in place for your spouse in retirement. For your spouse to continue on your Federal Employees Health Benefits (FEHB) plan after you pass away, you’ll need to leave some level of survivor benefits. For this reason, most federal employees carry at least the minimum amount of survivor annuity benefit, even if the spouse won’t need the income replacement at death. If this health coverage is important to your spouse, consider taking at least the minimum survivor benefit.
ARE YOU INSURABLE?
On the other hand, if you are considering leaving no survivor benefit and simply picking up private life insurance to provide for income replacement after your death, there are two important factors to consider. The first, as mentioned above, is your spouse’s health insurance. If your spouse is reliant on your FEHB, then you may consider taking at least the minimum survivor annuity.
Second, are you even able to get private life insurance? You cannot just assume that you will be able to buy any private policy you want—you must qualify. Life insurance is first purchased with your health, then your money. Poor health can result in higher life insurance premiums and even denial of coverage, which in some cases can make the survivor annuity the more cost-effective option. Good health can have the opposite effect. The survivor annuity is not subject to these conditions; you’re automatically eligible for coverage at a standard 10 percent cost.
BE A WISE CONSUMER.
There is no easy way to determine which of the various levels of survivor annuity benefits and life insurance options are best for you; it ultimately comes down to a matter of personal choice. That’s why we suggest having an insurance professional perform a needs analysis for your particular situation.
Let’s consider the case of Alex, who, like many federal employees, wants to make sure his family is taken care of in the event of his death. As a FERS employee, he will get an annuity when he retires at age fifty-eight. He is struggling with his survivor annuity options for his wife, Pam, who is also age fifty-eight. He knows he can get a higher annuity benefit for the rest of his life if he does not choose a survivor annuity, but he also does not want Pam to struggle if he predeceases her or for her to be left without federal health insurance.
As a FERS employee, Alex can choose 50 percent, 25 percent, or 0 percent. For this example, let’s assume Alex chooses the 25 percent option for health benefit purposes. Also, let’s assume Alex has a high-three of $110,769 with thirty-two and a half years of service at retirement. The chart below displays some of Alex’s choices regarding his annuity options.
PENSION MAXIMIZATION
It may be possible for Alex to take the higher annuity and still be able to provide for his wife’s security in the event of his passing. He can use what is commonly called pension maximization, which uses life insurance to replace a portion of Alex’s annuity at his death. This requires, in part, estimating how much Alex is likely to pay if he opts for a private policy instead of the survivor benefit option. Pension maximization starts by estimating the future value of your spouse’s survivor annuity. In Alex’s case, we multiply $750 by a predetermined multiple based on Pam’s age. In this way, we are able to estimate the future value of Pam’s survivor benefit, which comes out to approximately $150,000. (We are omitting the calculation because it is complex, varies per individual, and provides only an estimate; you need to see a professional for this.)
Once Alex knows the value of the federal annuity, he may be able to use a combination of term and permanent life insurance policies to replace this future value. By looking at the premiums, he can compare the costs of private policies with the costs of the survivor annuity.
Carefully research life insurance policies and verify the length of time the policy is guaranteed. As an extra incentive, a few life insurance companies offer different variations of long-term care provisions as part of their policies.
Do not blindly accept the default survivor benefit. You are in control, not OPM. Your pension income will most likely be needed by your surviving spouse. Do your due diligence and be a wise consumer by knowing all of your options. Understand how your survivor annuity choices will affect your spouse’s federal health insurance. Whether you pay for life insurance premiums, take the pension reduction that comes with survivor benefits, or both, know that it will not be cheap.
