There are two things to consider if you do not want to leave a survivor benefit and pick up private life insurance to get an income replacement after your death.
The first one is the surviving spouse’s health insurance. If your spouse depends on your federal employee health benefits, you must take at least the minimum survivor annuity.
The other one is, can you take private life insurance? You cannot merely get an individual life insurance policy. There are specific rules and obligations that you need to follow to qualify.
Initially, life insurance is purchased with your health, and then you can buy it with your money. If you have poor health, you are at a higher risk of paying higher life insurance premiums, and sometimes, the insurance company doesn’t allow you to get insured under their cover. In that case, the survivor annuity is the only cost-effective option available to you.
I you’re in good health, the insurance company’s behavior can be the opposite. The survivor annuity does not depend on these conditions, and you are automatically eligible for the health coverage at a standard 10% of the cost.
Be a wise consumer
It is not easy to calculate the levels of survivor annuity benefits and the best options for getting life insurance. We advise people to look for an insurance professional to do a needs analysis according to your situation.
Just look at the case of Alex, a federal employee like many who want to take care of his family’s financial situation even after his death.
Under the FERS system, he will get an annuity when he retires at 58. He is now looking for his survivor annuity options for his wife, Pam, aged 58. He has done some homework and knows that he can get a higher annuity benefit for the rest of his life if he opts out of survivor annuity, but he does not want his wife to struggle if he leaves her without federal health insurance.
Being a FERS employee, Alex gets 50%, 25%, or 0%. In this case, let’s say Alex opts for the 25% option for getting health benefits.
Also, let us suppose Alex has a high-three of $110,769 with 32.5 years of service at retirement.
This shows Alex’s choices for his options.
High-Three = $110,769
Years of Service = 32.5
Alex’s monthly annuity (no survivor annuity covered)
$3,000
Alex’s monthly annuity (survivor annuity covered)
$2,850
His wife’s monthly annuity (at 25%)
$750
Alex’s monthly cost of survivor annuity
$150
Pension maximization is the key.
There are chances that Alex may take the higher annuity and provide security to his wife even after his death.
He should go for pension maximization. Yes, you read it right! Pension maximizes the life insurance and replaces a portion of his annuity at his death. But for this, Alex needs to estimate the amount he needs to pay if he looks for a private policy instead of his survivor benefit.
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. This way, we can estimate the value of Pam’s survivor benefit, which comes out to be approximately $150,000.
Once Alex can calculate his federal annuity, he will be able to combine his term and permanent life insurance policies with changing the future outcome. He must look at the premiums and compare the costs of private policies, considering the costs of the survivor annuity.
Spend some time and try to do some research on life insurance policies and check the duration of the policy’s guarantee. Many life insurance companies offer different types of long-term care provisions as a part of their plans, so invest in them.
Please do not accept the default survivor benefit without giving it a thought.
Your surviving spouse will depend on your pension income. Do your duty wisely and be a wise consumer and understand all of your options. You must understand how your survivor annuity choices will impact your spouse’s federal health insurance. You have options of paying for life insurance premiums, taking the pension reduction with survivor benefits, or you can go for both, but make sure you know which one is cheap.
