“Insurable Interest” – Survivor Annuities

8.23.24: Audio automatically transcribed by Sonix

8.23.24: this mp3 audio file was automatically transcribed by Sonix with the best speech-to-text algorithms. This transcript may contain errors.

Speaker1:
Welcome back to the federal retirement Show. I'm your host, Val Majewski with American Benefits Exchange. As always, I really appreciate you taking the time out of your schedule to view our content, to see what we have for you, the federal employee. And that's why we do what we do. We want to give you honest and accurate information when it comes to your benefits and retirement situations, so that you can make the best decisions as you're going through your working career and nearing and entering retirement. Today's topic comes from a recent questions we've been getting from a federal employee that was talking about survivor benefits. Now, you may remember and recall and have seen our previous episodes where we talk about the survivor benefit plan with the federal government for retirees. And what this typically means is that when you retire, you have the ability as a federal employee, federal retiree, to leave a portion of your spouse or a portion of your spouse, portion of your benefit, excuse me to your spouse in the event that you predecease them in retirement. And this is slightly different. Today we're going to be talking about insurable interest survivor annuities, because you may have heard me say in the past that the survivor benefit is essentially a spouse only benefit. And that's true. Essentially, a spouse only benefit. It does not say that it's 100% of the time only.

Speaker1:
A spouse benefit. But just understand that there are other circumstances where you can leave a benefit to somebody who has insurable interest. So let's dive into today's content and talk about insurable interest survivor annuities. So again what what does all this mean. And we talk about the traditional survivor annuity. Right. As a first employee I'm just going to talk first because most of you on this are viewing this content are going to be first employees. If you are CSRs. I apologize. You can certainly reach out to us privately, individually. Go to our website WW dot federal Retirement show.com. Fill out the form. Ask us the questions that you need answers to, and we'd be happy to get back to you and get you what you need. But let's just look at it first. Employees you retire. You can elect to leave your spouse 25 or 50% of your pension in the event that you predecease your spouse. This is how it typically and traditionally works, right? Survivor benefit plan. This is generally for a spouse. There is a cost for this, right? If you leave the 25% option, it's going to cost you or reduce your pension by 5%. And if you left the 50% option, it's going to reduce your pension by 10%. So just understand these are the the choices generally as a survivor or surviving spouse with the survivor benefit plan for the retirees that are Fers employees.

Speaker1:
So what is the insurable interest? Survivor benefit mean? Well a Fers employee can leave a portion of their pension to somebody with insurable interest. Insurable interest. We're going to cover that here in a second. Should the retiree predecease the insurable interest beneficiary in retirement. So there's there are different reductions in different costs depending on who the insurable interest is and more importantly, what their age is. Now we'll go into the examples in a second. But like I said earlier, this is predominantly and mostly a spouse only benefit if you are married at the time of retirement. The default option that you have when you retire is the 50%. The full survivor benefit plan, the full survivor annuity. If you want to leave your spouse anything other than the maximum, they have to sign off on it. And even if you still have a surviving spouse and you want to leave this to an insurable interest person, they have to sign off on it. But generally speaking, 99%. Plus, if a person is married at the time of retirement, the person they're going to try to leave a benefit to is their spouse. So what does insurable interest mean? Well, just understand it's somebody that would, uh, financially or need to be financially taken care of or has an interest in the Urs retiree.

Speaker1:
Okay, now take out the spouse as an example, but it's somebody who is blood or an adoptive relative that is closer than a first cousin, closer than a first cousin. What can that be? Well, that could be a child, an adopted child. You know, somebody that has the insurable interest of a person who the retiree is engaged to be married to. So if it's not a true spouse, right. They're not married yet, but you're engaged to be married. This person would have an insurable interest, uh, person with whom you're living in a relationship that would constitute a common law marriage in a jurisdiction that recognizes common law marriages. So it may not be just an engagement. It could be a common law marriage where that person has an insurable interest. Essentially, it's like they're a spouse, but they're not officially on paper. So these are the things now there's a spouse or ex-spouse can be on here as well. And on the ex-spouse side, that just depends upon the divorce decree and what you've worked out in most cases. But let's just say this is a non spouse or ex-spouse insurable interest person. What would that look like? And I just said blood or adoptive relative closer than first cousin person whom you're engaged to be married or somebody that could be considered common law married to.

Speaker1:
They can have an insurable interest on you, and you can leave them when you're filling out your retirement paperwork, a benefit. Now, what does that benefit look like and what are the costs? I'll talk about what it looks like here. And then I'm going to give you an example that is straight off of Opm's Website in a second, but um, or straight off of the, uh, benefits site from one of the agencies. But this information is straight off of Opm's website. You can certainly look it up. I want you to verify all this, but what are the costs for it? I said earlier, the cost for the traditional benefit is either 10% or 5%, depending upon whether you're going with the 50 or the 25% survivor. If you choose the insurable interest benefit, the cost will vary and can get pretty high depending on the age or age difference between you and the person with insurable interest. So if you are the same age, or that person is older or you're less than five years apart, right, the person is less than five years younger than you, then the cost is 10%. The reduction to your first gross annuity.

Speaker2:
Is.

Speaker1:
10% 5 to 915. And you can see here all on this chart, how it goes up and if they're 30 or more years younger than you, the cost for this benefit to leave them some sort of insurable interest survivor benefit is 40%. Now your pension would be reduced by 40%. That is extremely high, very significant. In effect your pension a lot. So just understand that the cost varies and that cost actually is simple cost right. It does not increase with cost of living and things like that. I'm going to share with you an example. But the traditional survivor benefit either the 5% or 10% cost, depending on which benefit you go with for your spouse, this cost can be a lot higher depending on the age of the person with insurable interest. So not only do they have to qualify from an insurable interest standpoint, they have to have insurable interest in you and be one of those things that we just talked about on the previous slide. The cost will vary depending upon the age difference between you and the person with insurable interest. Now, if there again within five years from you the same age or older, that cost is minimized to 10%, but can be up to and over four at 40% if they are over 30 years younger than you, 30 or more years younger than you. So just understand the significance in that. Yeah, it sounds great that you can leave that benefit, but it's drastically going to reduce and be significant when it comes to your pension.

Speaker1:
So how do we calculate this? What does this look like. Well the actual survivor annuity benefit associated with the annuity. The survivor annuity is equal to 55% of the reduced Urs annuity. The reduced Fers annuity. So that's the gross annuity amount at the time of death less the survivor annuity cost. Now I said that survivor annuity cost in this scenario different than the typical spousal benefit is fixed. It's a fixed cost. So the actual survivor annuity to the insurable interest is 55% of the reduced Fers annuity, which is the gross amount at the time of death minus or less than the survivor annuity cost at the time of death. What does that mean? Well, the person is going to get cost of living adjustments and increases over time. They're going to just simply reduce that amount by the cost, depending upon the age of the person or the age difference. And then multiply that by 55%. So let's look at an example to kind of hit this home right. This is directly off of a government website. I can't take credit for creating this example, but it was directly off of one of the agency's websites going through an insurable interest. Example example. Right. So let's look at Mary. Mary's age 57 and a widow. So no spouse and wants to leave a benefit at 32 years of service scheduled to receive a Fers first gross annuity of $40,000 40,000. So with no spouse wants to give her daughter Susan, who's aged 25, a first insurable interest survivor annuity.

Speaker1:
Now, below is the cost to marry her. Net amount, and the benefit that her daughter Susan will get when Mary passes away. So again, this is the insurable interest example here. Insurable interest. So what's the cost? Well, if we look at age 57 down to age 25, that is over 30 years. Over 30 years. So the difference or the cost for that is going to be 40%. We went back one slide. It's 40%. So her gross annuity was $40,000. 40% of that is $16,000. So first of all Mary's coverage amount starts off at $24,000. So what she's going to get while she's alive for her pension was reduced from 40 down to $24,000 per year. And she'll start receiving colas and things like that, but initially it's 40. She was supposed to get 40 because of the 40% cost. It's now down to 24. That is very significant. So assuming no colas are applied, let's just assume that now she probably will, in this type of example of federal employees and retirees will get Colas. But Mary's net fers annuity 24,000 when she begins her original 40,000 will increase each year with Colas, but the original cost to give the insurable interest will remain at 16,000. So she's still going to be reduced by 16,000, even with any cost of living adjustments or things that she's given. So it's still a significant decrease or reduction to her pension. Now the benefit amount. So from that previous slide that we just had, how do they calculate the benefit amount. So Susan, the daughter will receive 55% of Mary's net Fers annuity net Fers annuity.

Speaker1:
So let's just say without any cost of living adjustments. We looked at it right away. Right. Mary was getting 24,000. That's her net fers annuity. 55% of that is 13,200, which is what Susan and her daughter would receive as a benefit if Mary were to pass away. Now, if she got cost of living adjustments, that number would be higher down the road. But it's 55% of the net amount. 55% of the net amount is is what the survivor, the one with insurable interest would receive. So this brings into consideration, yes, you can leave your benefit to somebody else you other than your spouse. You can have somebody that has insurable interest and would benefit greatly by for this, but would also be in a financial situation where they're they're dependent upon you right to they want to get that they have insurable interest, but understand the costs that are involved, the penalty you're going to receive. And I say penalty. It's not truly a penalty, but it is a cost. It's a reduction in your pension while you're alive. Mary would see a drastic 40% reduction in her pension while she's alive. Now, if she can stomach that and still live on it. Okay, but a lot of times this is a detriment to people when they're considering this. Which is why generally and typically it's a spouse type of benefit. But you've got to weigh all the options and understand this could happen. This could be something that you're looking at for somebody that's has insurable interest in this case.

Speaker1:
Mary in this example is a widow, does not have a spouse and still wants to leave something to her daughter. In a lot of cases, though, the cost does not justify the benefit. Now, what are other ways in which Mary would be able to provide a benefit to her daughter? Well, you might be thinking and you might have thought out loud or said it while you're watching this. Um, she can leave her daughter life insurance, right? She's got her fegley. Maybe she still has some of that, or she's got outside life insurance, or she wants to acquire outside life insurance where she can leave a significant tax free benefit to her daughter for pennies on the dollar. It's not going to cost her, say, $16,000 a year to leave her daughter $13,200 for the rest of her life. She can pay pennies of that on the dollar and give her a significant tax free death benefit in a lump sum using actual life insurance. Then there's the thing with TSP. She might have money in her TSP, where her daughter is named the beneficiary and might just say, hey, I'm not using my TSP or I'm not going to drain it all down. By the time I feel like I'm going to be passing away and can leave some to my daughter. That could be a more cost effective way to leave a benefit. Let's say none of that existed and she definitely wanted to do it.

Speaker1:
Just have to be able to stomach the costs involved and and pay or still be able to live on the the net amount when it comes to the pension. So if you do have questions about this, right, if you do think that you know you're interested in more, you want to look at your situation and see what the cost would be, what the benefit would be, look at any estimates. Please reach out to us. Go to our website. As I mentioned earlier w WW dot Federal Retirement Show.com fill out the form one of our reps across the country. If it's not me personally, we'll be reaching out to answer your questions. Get you the information you're looking for. Hey, we'll even provide a full benefits and retirement review for you, not just answer your specific question, but cover everything. And as a result of getting the benefits review completed, we can put a copy of my book in your hands. There's No Excuse your guide to maximizing your federal employee benefits. We'd love to do that. We'd love to talk to you, get you the information you're looking for, and answer all of your questions. Well, thank you for joining me on the federal retirement show. Again, my name is Val Majewski with American Benefits Exchange. I hope you found this information extremely helpful. Let us know if there's other topics that you want to listen to or hear about. We'd love to take your recommendations and suggestions, but look forward to seeing you on a future episode.

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