Survivor Benefit Basics: How does it work?

When you retire, your spouse will likely need the security that your Civil Service Retirement System (CSRS) or Federal Employees Retirement System (FERS) Retirement Annuity can provide in the form of the Survivor Benefit. This is a significant benefit from your federal employment and allows you to take care of your loved ones in the form of payments to the survivors after your death.

The Survivor Benefit is not free as it reduces your monthly annuity in retirement. Your annuity must be reduced to pay for the survivor annuity. There are three options for FERS employees to choose from at retirement (different rules apply for CSRS).

Reduced Annuity with Maximum Survivor Annuity

For those married at retirement, an annuity with full survivor benefits for your spouse is required by law. This is unless your spouse consents to your election not to provide maximum survivor benefits. Your spouse’s annuity will be 50% of your unreduced annuity upon your death. The cost of this reduces your annuity by 10%.

Example:

Basic Annual Annuity before Survivor costs: $42,000
Survivor Annuity Cost:  10% of $42,000 = $4,200
Annual Reduced Annuity: $42,000 – $4,200 = $37,800

Annual Survivor Benefit (50% of Basic Annual Annuity $42,000) = $21,000

Reduced Annuity with Partial Survivor Annuity

Your spouse’s annuity will be 25% of your unreduced annuity upon your death. The cost of this reduces your annuity by 5%. The spouse’s consent is required for this option, and this acknowledgment must be notarized.

Example:

Basic Annual Annuity before Survivor costs: $42,000
Survivor Annuity Cost:  5% of $42,000 = $2,100
Annual Reduced Annuity: $42,000 – $2,100 = $39,900

Annual Survivor Benefit (25% of Basic Annual Annuity $42,000) = $10,500

Full Annuity Payable Only During Your Lifetime

If you are married at retirement, you cannot choose this type of annuity without your spouse’s consent. The agreement will need to be notarized as well. A survivor annuity will not be paid to your spouse after your death, and any health benefits through Federal Employees Health Benefits (FEHB) will cease. In addition, your spouse will not be eligible to enroll in the Federal Long-Term Care Insurance Program (FLTCIP) if they are not enrolled before your death.

Other important things to know about the Survivor Benefit Plan:

• This reduced annuity becomes your retirement annuity throughout your lifetime if you choose the Survivor Benefit option.
• The cost will be deducted for as long as you have a qualifying spouse. If “Cost of Living” increases affect your monthly pension, the cost of the Survivor Benefit will likewise increase by the COLA percent.
• If your spouse predeceases you, the cost deductions will stop; but you will not receive a refund of the previous deductions.

Pension Maximization

If you were to pass away as a retired federal employee and your spouse survives you, would you be okay with your spouse losing their Federal Employee Health Benefits (FEHB) coverage? A surviving spouse is not eligible to continue FEHB after the retired federal employee dies unless they elected a survivor benefit option.

You might think, “well, of course, someone would elect the survivor benefit.” This is not always the case. Some have accumulated enough assets that they may not see a survivor benefit as necessary and forego it so that the employee’s pension is not reduced by 10% during their lifetimes. This can come at a significant cost – your spouse will lose their FEHB.

They’d rather get the higher monthly annuity payout while alive and perhaps get another life insurance policy with a premium that costs less than the reduced annuity amount. This is commonly referred to as Pension Maximization. However, this could mean your spouse will lose their healthcare coverage upon your demise. The exception to this is if the spouse is also an eligible federal employee; they would be entitled to their own coverage.

Providing the surviving spouse with sufficient income for life with pension maximization may have benefits in certain circumstances. However, since such a strategy can be complicated, it should be discussed with a professional.