Leaving Assets to Loved Ones? Part 2

Leaving Assets to Loved Ones – Part Two.mp3: Audio automatically transcribed by Sonix

Leaving Assets to Loved Ones – Part Two.mp3: this mp3 audio file was automatically transcribed by Sonix with the best speech-to-text algorithms. This transcript may contain errors.

Speaker 1:
Welcome back to the Federal Retirement Show. I'm your host, Val Majewski with American Benefits Exchange. I really appreciate you taking the time to view our content. Uh, that's what it's here for. It's for you, the federal employee, that's looking for information regarding your benefits and retirement situation. And today we're piggybacking on our last episode. Last episode, we were talking about those that want to leave assets to their loved ones when they pass. And the alternative, the suggestion was the verdict that we came to at the end was to buy life insurance if you're eligible, because it provides a better value for those that want to transfer wealth to pass on assets. It's a it's an easier transition. And I want to complement that by talking specifically about the survivor benefits with the federal government. We've done several episodes on this before, but just piggybacking on the life insurance aspect and saying, if you're considering leaving survivor benefits to your loved ones, consider the last time I said bye. But today it's going to be consider life insurance and I'll explain as we go and we'll go through a couple scenarios. So let's dive into today's content and talking about considering life insurance when compared to the survivor benefits with the federal government. So what are we talking about? So we're going to say a federal employee when they retire, you go through that retirement application and you have to select what you're going to leave to your spouse.

Speaker 1:
Now, it's usually called a survivor benefit for a spouse. But there are ways, and I've talked about this recently with the federal employee that I walk through and help walk through the retirement application, just going over the different options and what they mean. Um, you can leave survivor benefits to somebody that has insurable interest, but the cost for that changes. And we'll talk about that here in just a second. But let's just say it's it's mostly a spousal benefit. We're going to look at what happens if the federal employee dies first in retirement. We're going to talk about what happens if the spouse dies first in retirement. And what is the most effective way we'll come to a verdict. Again. What is the most effective way to leave survivor benefits when you pass first or in these other situations? What if you don't? So we'll cover all of this as we go. Now, just a quick review on what the survivor benefits are. What I'm talking about here when it comes to your retirement selections, this is for retirees, federal employee retirees that want to leave something to their spouse, meaning you're going to get a pension. You can. This is the continuation of your pension beyond you to your spouse. Now, they attach the federal employee health benefits to this decision. I'll talk about this here in just a little bit. It's mostly a spouse only.

Speaker 1:
I talked briefly just before about insurable interest people. So some folks, maybe it's a dependent child or an actual child or some other relative that has an insurable interest. You can actually leave that to them. They can get the continuation of your pension, but the costs are a lot higher. So I'll talk about the cost here in just a second. And it's essentially a permanent choice. So once you make this choice you're not really going back on it. Well it's kind of set in stone. I say kind of because 95 plus percent of the time you're not going to be able to change it. There's an 18 month window when you first retire that you can make a modification to that change. But really it's only to increase the benefit election, meaning if you didn't select the survivor benefit initially, you can add one, or if you added the smaller one, you can add the bigger one. But generally speaking, you're not going to be able to take it away. So it's essentially a permanent choice. So what are the two options, the two choices that you have if you're considering this. And this is something to consider not just at retirement but prior to Retirement because you want to be prepared for this, and you want to see if there's a better way to provide these benefits to your spouse or to your loved ones. So if you do not select a survivor benefit, you keep your full pension.

Speaker 1:
There's no reduction, there's no death benefit. There's no transfer of your pension to your spouse or somebody else upon death, but you've gotten your maximum pension, its full pension, and there's no fhlbb continuation. Now, this is the big thing, is the reason why the people would still choose the federal employee survivor benefits plan, even if you think it's a bad deal, is because they want to 100% ensure that their surviving spouse can continue the health insurance. So I'll say it like this if you retire from the federal government and you do not elect a survivor benefit and you die first in retirement, then your health insurance dies with you. If you want to ensure that your spouse can continue your health insurance. If you died first, then you need to at least elect the minimal survivor benefit. They can keep the health insurance. They'll get a little bit of your pension or up to 50%, and they still have to pay for the health insurance, but they can keep it. Now, if you do choose a survivor benefit, yes, you're going to have a reduced pension. How much depends on which option you choose that your spouse will get a death benefit. Your pension will continue beyond you at whatever percentage you elected. And yes, they can keep. The surviving spouse can keep the health insurance. Now, as a first employee, I'm not going into CSRs, but really quick to review this Fers employees, you have two choices.

Speaker 1:
If you're going to leave a survivor benefit, it's 25% or 50%. This comes at a cost, a reduction of your pension. So if you choose the 25% option, it's a 5% reduction of your pension. The 50% option is a 10% reduction of your pension. Now this is percentage, right? It's a percentage. So what happens to your pension over time? Your pension will get cost of living adjustments and things of that nature. So essentially your cost will also increase over time. That 5% or 10% reduction. It's a percentage that grows with you. So that cost is escalating. It's increasing over time. And for those that wanted to take an insurable interest, well, depends on who that insurable interest person is. But the cost can be anywhere from 10% up to 40% of your pension, depending on the person that you're trying to insure. We had a, I had a federal employee that I was talking to about retirement earlier, and they just said, oh, I can leave it to my son, or I can leave it to somebody else who has insurable interest. And we worked on the numbers and it was up to 40% reduction that they were going to see. And they said, oh, I didn't realize it was going to be that much. So they decided against it. But some people make these decisions not knowing what the repercussions are going to be, and they find out too late or when it is too late that they can't change their election.

Speaker 1:
So looking at this example, how would it work? Let's say a first employee had a $33,000 a year pension. Um, they wanted to leave the maximum survivor benefit. It's going to cost them 10% as we just said. So what does that mean? The spouse upon death of the retiree would receive half 50% in this case 16,500. So. Right. The surviving spouse gets 50% of the pension going for the rest of their life. It doesn't matter how long they live, they can live only one month, or they can live 30 years beyond the retiree that died. They'll get that going forward. And the cost during the retiree's lifetime was 10% in this case, or $275 a month. So what if there was a better way to leave this pension amount, this surviving benefit to the spouse did a better job of utilizing that 275 a month. Now, you may not look at it like a cost because it's a reduction of your benefits, but yes, it's a cost. It's not going to show up as a deduction on your retirement paycheck stub. But it is a reduction of your benefit. So essentially again a cost. So you pay a premium right. There's a there's a cost involved and you receive a reduced benefit.

Speaker 1:
Uh, there's, there's no cash build up. So all that, that in this case, 275 a month is not going somewhere. It's not building cash and there's lack of options in retirement and death. I want to go over this because this is a big thing when we're when we're considering what's a better option, right? I said consider buy life insurance for this as an alternative to the survivor benefits, lack of options in retirement. How does that work? Well, I said the selection of a survivor benefit is essentially set in stone, a permanent choice. You're not going to make changes. And I'll give you an example. Let's say that a retiree chooses the 50% option. In this case, it was 275 a month that they were getting a reduction of in their benefits. That was the cost, if you will. Now that cost can increase over time with cost of living adjustments. But let's say five years down the road, the retiree in their spouse, we're looking at each other saying, you know what? We can really use that 275 back into the paycheck. We don't need the survivor benefit anymore. Let's get rid of it. You can't you can't make that change. It's it's set in stone. As I said, the only way that a federal employee can make a change to their survivor benefit plan that far down the line is if the spouse dies first, they can cancel it and regain their full pension, but they don't get back any of the 275 that they paid in this example.

Speaker 1:
Each month, for however long the retiree lived in retirement. Um, and then if they were not married at the time of retirement, obviously they wouldn't have a survivor benefit. And then they got married. That's another life changing event. They can add the survivor benefit. Uh, those are the two ways that they can do it. They can add it if they get married in retirement, and they need to now add it as a life changing event. Or if the spouse dies first. That's another qualifying event. They can cancel it, but they don't get back any of the money. In this case 275 a month that they put into it. I said, as much as I might think that this is a bad deal for most of you, I would still recommend it. In certain cases. If you 100% need to ensure that your spouse can continue the health insurance, then we'd say, okay, you need to at least elect the 25% option, the minimum option. I think it's a bad piece of life insurance, but everybody's situation is different overall. If you nobody needed the health insurance, I and you can qualify for outside life insurance, I'd say the life insurance is going to give you a better value, but that's not the case in every situation. So we got to take it case by case.

Speaker 1:
I can't just make a blanket statement for everybody to look at life insurance. That's why I say consider life insurance. At least look at that option. See if you qualify. See what your plan would look like in the end. So let's do a comparison of the SBP, the survivor benefit plan, and private life insurance. And how does this work? Why do I think you should consider life insurance, and why have we talked about getting better value by instead of leaving assets, leaving life insurance? In this case, instead of leaving the survivor benefit? Leave life insurance. Well, first of all, life insurance on the private side is a contractual agreement between you and the life insurance company. So you have documentation, you have that policy. There's not going to be any change. You've signed it. It's a it's an agreement between you and the life insurance company. And not that the government is going to do this, but Congress can make changes to these plans at any time, with or without your say. It's not set in stone that it's always going to be this way. And we've seen modifications to other plans come and go, at least in my 14 years of working specifically with federal employees, I've seen a lot of changes when it comes to benefits and retirement. So changes can happen. Managing costs. As I said, the program can get very expensive with survivor benefits because that cost is going to increase as your pension increases due to cost of living adjustments.

Speaker 1:
That percentage that you're missing out on is getting bigger and bigger as well. Cost generally in life insurance plans are fixed. Once you start with it, it's going to last for the rest of your life, or as long as you're continuing to pay for it, or as long as the plan will last. In a lot of cases. With this, if people are trying to leave something to their loved ones, right? Instead of leaving assets, leaving life insurance, you're looking at permanent type plans. So if you continue to pay the premiums, the plan will last for the rest of your life. The premiums will remain level in. In most plans that we, we look at, um, cost savings when it comes to life insurance. I said earlier, you got to see if you qualify and the healthier you are, the cheaper it's going to be. So there are some good health discounts with the government plan. That's not an option. Beneficiaries. We mentioned that the survivor plan with the government is a spouse only benefit. I should say mostly spouse only, but with real life insurance, you can name whoever you want and the cost is not going to change based upon who you name. Right. But the government, if I name a spouse, the maximum cost is 10%. But if I go to an insurable interest person, that costs can get up to 40%.

Speaker 1:
With real life insurance, you name whoever you want as your beneficiary, that does not affect your cost. And we said family protection, the government plan, the most that you can get is up to 50% 50%. With the survivor benefit, maybe the spouse needs more than 50%, maybe you want to customize it and you want 42%. I'm just throwing a number out there, but you can customize it with real life insurance. It's a customizable plan. With the government, you can only leave 25% or 50%. So just understand the family protection may not be covered entirely with the 50% with the government. And the cool thing is you can customize it with a private plan taxation, the surviving spouses income that comes from the survivor benefit plan is still taxed as ordinary income. If it comes from a life insurance policy, it's tax free. We talked about that before, uh, in part one of instead of leaving assets, buy life insurance proof of insurability. Yeah, this is where the government plan works out best. If you're not healthy enough, then to qualify for private life insurance, then we probably still recommend sticking with the government plan. If you want to leave something to your spouse. That's the only negative here. With this, you have to qualify health wise, uh, reducing coverage. You can't make changes and modifications. There's lack of options. As we talked about, you can make modifications and changes to this over time.

Speaker 1:
We're going to go over two scenarios in just a second. Coverage limits. Yeah. You're limited with the survivor benefit plan. We just talked about that. You can either choose 25 or 50%, nothing more than 50%. With this, you can even go over 100% if you wanted for the surviving spouse. That's the customization of these plans. And we talked about, you know, the family needs making sure that everything is covered with the family. So looking at those those options, before I get into some of the the summarizing of this, looking at those two scenarios, I mentioned, what if, what if in these scenarios we're talking about the retiree dies first, okay, the retiree dies first. How does that work? Well, the spouse will continue with the survivor benefit plan. Whatever election was taken, 25% or 50%, we just said it'll be taxed. And there's no guarantee of how much the spouse is going to get the idea for you. All the federal retirees is to live long into retirement. If you lived 15 or 20 years into retirement, how much cost are you going to be putting in at 275 a month? Over that time, it's going to be a lot. And there's no guarantee that your surviving spouse is going to live long enough to even recoup all the costs that you had from the program. You hope that they do.

Speaker 1:
But the way that this works out the best cost wise is if you retire, you die right away and your spouse lives forever. You paid the minimal amount of money into the program and they got the most benefit out. That is not a deal at all. We don't want that to happen. We want you to live long into retirement, but there's no guarantee in the end that your spouse is going to collect enough benefits in order to recoup all the costs that you put into the program. And their benefits, oh, by the way, are still taxed. How does it work with the private life insurance plan? Well, based on the criteria we just mentioned, private life insurance, you can have maybe two options. You have choices here. When you pass away, your spouse can choose a tax free lump sum death benefit tax free lump sum. A lump sum option is not available with the government plan, or your spouse can choose a tax free monthly benefit for the rest of their life. They have options choices which are not available with the government plan. Plus it's tax free on the private life insurance side. That in itself should be a reason to consider life insurance now as the retiree. The other option, the other scenario is what if your spouse dies first? Well, we talked with the survivor benefit plan. That's a life changing event. You can cancel your survivor benefits and regain your full pension, but you do not get back all the money that you put into it.

Speaker 1:
So in this case, let's say you lived you and your spouse 20 years into retirement. You're paying for my example, $275 a month every month for 20 years. Then your spouse dies. First, you can cancel the survivor benefit, regain your full pension, but you do not get back any of that money that you put into the plan. So going forward, you just get your full pension. But all that money that was spent, so to speak, is not given back to you. How does it work with private life insurance? Well, your spouse dies first. You can keep the plan in place and then change your beneficiaries. You can say, oh, I want to leave it to my kids, my grandkids, whatever. You can do that with the private life insurance that you cannot do with the survivor benefit plan. So you can keep the same plan in place, keep the life insurance in place, change your beneficiaries, or you can surrender the policy, cancel it. Similar to how you would cancel your survivor benefit plan, cancel the policy. But because this policy build up some equity, it built up cash over time. You get some not all of the money that you put into the plan back. So your net cost is drastically reduced while you are keeping a better benefit for your spouse if you died first.

Speaker 1:
So this is where the flexibility and options come upon death of the spouse. You can keep the plan in place and change the beneficiaries not available with the government plan. And then the second option is canceling it, surrendering it, and getting back some of the money because there's cash value build up in the life insurance. Pretty awesome. And if you're agreeing with me, you know, let me know if you disagree with me. Also let me know. I want to hear a different perspective on this, but I've been talking to a lot of federal employees over the years, and this is kind of the conclusion we come to. If you can qualify, it's going to be much better value. And why consider life insurance. We're going to review the points I did on part one. If you did not see part one, it's income tax free. Pretty simple life insurance benefits come to you. Income tax free. It bypasses probate. Okay. They they go directly to the beneficiaries bypasses creditors. There's. And for pennies on the dollar we can get the same protection with less cost over time getting better value because the plan, especially in this case with survivor benefits, the plan that we would put as an alternative would build cash, would build equity over time. So that way you have options depending on what happens first. If you as a retiree pass first or if a spouse passes first.

Speaker 1:
So the verdict on this on life insurance compared to rice, a private life insurance, because I think the survivor benefit, as I said earlier, is a bad piece of life insurance. Uh, the overall verdict is that life insurance will provide better value and more options for the plan holder down the road. Now, the only hiccup revolves around the fhlbb, right? The federal employee health benefits. If and I'm going to say this as much as I have that in read that I think life insurance is a better value. I'm not going to make the blanket statement and say, everybody should give up the survivor benefit and get private life insurance instead. Not the case, because every situation is different. If you 100% need to make sure the health insurance will continue to your spouse, I will 100% recommend at least the 25% option for the survivor benefit. That's that helps guarantee that your spouse can continue the health insurance. So the only negative as we went through that chart was that you have to qualify health wise. And if you want to see if you qualify or if you want to see if it's a good plan for you and your spouse because you are were considering leaving a survivor benefit. If you're within 3 to 5 years from retirement, this is something to look into. Now, I know you're saying, well, why would I start paying into this now? Why would I start doing this? Because you're younger and if you're in good health, great.

Speaker 1:
You get a good health discount. You're younger, it's going to be cheaper. You're going to start building that equity sooner, but you're going to create this plan that you're putting in place. Not only is a good life insurance for you now, but it's going to continue to be a survivor alternative for you down the road. So if you're within 3 to 5 years from retirement, I would definitely start looking at this as an alternative. So you know where you stand and see if you qualify for this because not everybody does. I got to be clear about that. And it's good to know now, um, rather than waiting towards the end. So we've been in this, this little two part series we're talking about instead of leaving assets or leaving the survivor benefit to your loved ones, to your spouse, consider looking at life insurance as better value, more functionality options, uh, creativity. Right. Because this is all customizable for everybody's situation. And we've run through so many of these and have helped out so many federal employees over the years, you know, build their customized plan and for you and your spouse, love to talk to you and see if you qualify and what that plan would look like. So go to our website. It's federal retirement show.com.

Speaker 1:
Fill out the form one of our experts. If it's not me personally, we'll be reaching out and make sure to bring up that you want to look at survivor benefit alternatives. And that way we can run the reports, we can run the scenarios. You can compare and contrast, lay it all out on the table, and decide which direction is better for you and your family. So I really appreciate, again, as I said earlier, you taking the time out of your schedule to view our content. If you like this episode, go back and view our others. We've got over 175 episodes of all content created just for you federal employees looking for information when it comes to benefits and retirement. And last favor I'd ask is do not keep us a secret. Share the federal retirement show with one of your colleagues. You work with a ton of other federal employees that have never heard of us. If you like it, share it. Tell us somebody else about it. Bring them to the show. Because chances are they have questions that they want answered. And some of our episodes 175 plus of them will probably answer their questions. And we can also invite them to get a personalized benefits and retirement review. So my name again is Val Majewski with American Benefits Exchange. You've been watching the Federal Retirement Show, and I look forward to seeing you on a future episode.

Speaker 2:
May is Military Appreciation Month a time to honor the men and women who serve and have served our great nation. And while we honor those associated with the military, members and veterans are fighting a different battle, finances and purpose. I'm Jim Talbot here For the retirement radio network powered by Amora life. For many who leave the military, the biggest challenge isn't just money, it's finding purpose in a new civilian world. After years of mission driven service with tight knit camaraderie, the transition can feel like losing your compass. Veterans often speak of searching for that same sense of meaning. Brian O'Connor, co-founder of Veteran Enhanced Technology Solutions, explained at a recent Ted talk. Where to start that search.

Speaker 3:
Once you have your identity, you can then begin searching for purpose. We chose to focus on identity, purpose and belonging, and do so through a routine of familiarity. We considered what did we do in the military that made us feel bonded.

Speaker 2:
Financial stability plays a key role in the search for purpose. With a solid financial foundation, veterans gain the freedom to chase meaningful work instead of just any paycheck. Fortunately, several powerful financial vehicles are available specifically for former service members. The VA Home Loan Program stands out, offering the chance to buy a home with no down payment and no private mortgage insurance. Many also tap the G.I. Bill to invest in education or training that aligns with a new purpose driven path for those drawn to entrepreneurship. The VA and Small Business Administration offer support for veteran owned businesses, including special loan programs and certifications that open doors to federal contracts. Veterans can continue growing retirement savings through the Military Savings Deposit Program, and a CNBC Sharon Epperson reiterates don't forget about the Thrift Savings plan.

Speaker 4:
It's a low cost version of a 401 K that's open to all service members. Choose a traditional TSP or Roth TSP, which will allow you to make tax free withdrawals in retirement.

Speaker 2:
So whether you're still in uniform or years into civilian life. May is a good reminder. The best way to honor service is to make sure those who served are set up for financial success and purpose, long after they take off the uniform for the retirement radio network powered by a marine life. I'm Jim Teraoka.

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