Survivor Benefit: Why It May Not Be Right For You
WHY MOST FEDS ARE OVERPAYING FOR THE SURVIVOR BENEFIT
- April 9, 2020
- 9:25 PM
Written By: Joseph Polakovic
As a federal employee, you have the ability to leave a portion of your pension to a survivor, typically your spouse, upon your death. This is called the Survivor Benefit, and for most employees, it seems like a no brainer to select this upon retirement. However, the actual cost of this is likely way greater than most people realize. For FERS employees, this cost comes in the form of a deduction from their monthly pension check that could be either:
- 5% pension reduction for survivor to receive 25% of your unreduced pension
- 10% pension reduction for survivor to receive 50% of your unreduced pension
Take a Look Under the Hood
This benefit isn’t for everyone so let’s break this down. You are receiving less money (essentially paying a premium) so that someone else can receive a monetary benefit upon your death. What does that sound like? Yep, Life Insurance. If you are electing this benefit you are essentially purchasing an expensive life insurance policy, however, you are missing out on the biggest advantages!
For instance:
Survivor Benefit
Payout in Taxable Monthly Sums
Only Goes to Spouse*
Beneficiary May Pass Away First
Unable to Cancel
Survivor Benefit Traditional Life Insurance
One Non-Taxable Sum
Can Elect Beneficiaries
Can Change Beneficiary if They Predecease
Cancel Anytime
That’s right, the government knows this is such a good deal for them that after 30 days they will not let you cancel it unless you can prove your spouse has passed away or you are no longer together. Very expensive, very inflexible, and very tax disadvantageous. Still don’t believe me that this thing is a great deal for the government? Do your retirement paperwork and see what hoops you need to jump through to NOT elect this. The government makes you second guess your decision if you don’t elect the full benefit by making your spouse acknowledge your decision in front of a notary.
Who IS This Good For?
One important thing to note. If you and your spouse have your healthcare coverage through the government (FEHB), if you pass away and do not leave a survivor benefit, your spouse’s healthcare coverage will lapse. This can be concerning for some, but as long as you’ve planned appropriately in other aspects of your retirement this “problem” can easily be avoided. Don’t forget, qualifying for medicare starts at age 65.
Additionally, if you wish to leave a benefit for your spouse upon your passing but your health does not allow you to qualify for outside life insurance, the survivor benefit may be your only option. There is no medical exam required to be eligible for the survivor benefit and once you start, your premiums will stay consistent with the above calculation.
Final Note
There are a lot of factors to consider when looking at the survivor benefit and a wrong choice could cost you long term. If you’re interested in diagnosing whether this benefit makes sense for your situation please reach out!
*Election can be designated to a dependent child but would stop at a certain age, or a former spouse
