Things to Know About Your Survivor Benefits Plan: Audio automatically transcribed by Sonix
Things to Know About Your Survivor Benefits Plan: this mp3 audio file was automatically transcribed by Sonix with the best speech-to-text algorithms. This transcript may contain errors.
Speaker1:
Hey, welcome back, everybody, to the federal retirement show. I'm your host, Val Majewski, with American Benefits Exchange, and we're going to continue on with our theme when we're covering some of the top 10 mistakes that we see federal employees make. Now, if you found us on a previous episode or watched any of our previous episodes, we've gone over a pamphlet, a brochure, something that we've put together in our experience. What we see federal employees do and how how they, I say, mess things up, right? The mistakes that they make. And I'm not saying that you're messing things up, but just want to help you avoid any of these mistakes that can be financially detrimental to your working career and for you in retirement. So today we're going to be continuing with number seven, the number seven mistake that we see people make and it is choosing the wrong, I should say, survivor benefit option in retirement, otherwise known as SBP. So today is going to be SBP survivor benefits plan, the dos and don'ts. Now what is SBP? Well, again, it's the survivor benefits plan. What exactly is that? You may be thinking, Well, that's great. What is? It sounds familiar. Maybe I'm aware of what this is. It's not something that you have to choose when you first get hired. It's not something you have to choose when you're in the middle of your career. This is a choice that you make in retirement, and this is a choice that you determine how much of your pension your surviving spouse is going to get if you predeceased them in retirement, how much of your pension, your retirement your spouse is going to get if you die first in retirement and this is something that you elect when you first retire, it's not something that you're going to change along the way.
Speaker1:
This is an election at retirement, and this is a basically a set in stone permanent decision. We'll get into that here in a little bit. So you want to make sure that you choose the appropriate choice. You want to make sure you understand the consequences, both the pluses and minuses of that choice and what that's going to do to your pension and how that's going to affect you going forward. Now I will say at the beginning, because I can give you my opinion. Your situation is going to be different and I can give you my general guidance on this. But what makes this attractive, even though and I'm going to go through, I think this is a bad piece of life insurance. What makes it attractive and what makes this choice even harder for federal employees is they attach the federal employee health benefits to this decision. Now what does that mean? Again, you're not choosing this now while you're working, but in retirement, when you file your paperwork, you need to make this decision, whether you choose not to have a survivor benefit or you choose some sort of survivor benefit.
Speaker1:
They attach the federal employee health benefits to it again. What does that mean? Well, let's say that you're the federal employee and you and your spouse are on your health benefits if you want to absolutely 100 percent make sure that even if you die first that your spouse can continue the health benefits, then you need to at least elect a minimal survivor benefit. I'll give you an example. Let's say you're the federal employee and you retire and you say, I do not want a survivor benefit. Nothing. I want to get the maximum pension. I do not want a survivor benefit you and your spouse or on your health benefits. Now, while you're alive, even in retirement, both you and your spouse will enjoy your health benefits if you pass away first. Since you did not elect the survivor benefit, your health insurance will die with you. They can no longer continue your health insurance. So for a lot that I talked to, they may realize, Look, I don't necessarily want to pay for the survivor benefit. We're going to get into the cost here in a little bit. But I need to take this benefit because my spouse, one hundred percent needs to be certain that they can continue the health insurance, my federal employee health benefits. So that's a big kind of sticking point when it comes to choosing the appropriate selection. You may not like the selection, but you may be forced to take it if you one hundred percent need to make sure that your spouse can continue the health benefits.
Speaker1:
Now there's two different types we have the CSR system and the first system. Let me talk to the old system first. Now, there may be not as many of you as there used to be, but some of you watching this, maybe in the old system saying, Hey, what are my choices? I'm thinking of retiring very soon. How does this impact me? So if you're a CSR employee, you have some options here, and I'm going to try and describe this as simply as possible, but you can choose to leave your spouse. Fifty five percent of whatever benefit base you choose now, what is a benefit base? Because now you have some flexibility here. The benefit base is whatever portion of your pension you choose from, the minimal amount to the maximum amount. So the maximum that you can choose in a benefit base is your full pension, your full CSR annuity. The maximum survivor benefit you can leave as a CSR employee is fifty five percent of your full pension, the minimum that you can leave your spouse or the minimum benefit base that you can choose from is twenty two dollars. Now, why is that significant? Because fifty five percent of twenty two dollars is twelve dollars, which is one dollar a month. So the minimum that you can leave your spouse should you pass away first is one dollar a month.
Speaker1:
Now, you probably wouldn't just do that. But why is that significant? Because even at one dollar per month, your surviving spouse can still keep the health insurance. Now you'd probably want to finagle it, right? This is a sliding scale from twenty two dollars all the way up to your full pension. You'd probably want to work the numbers so that at least fifty five percent would cover the cost of the health insurance because they still have to pay the premium for the health insurance. Now, cost for this for CSRs is just under 10 percent of the benefit based selected. So if you chose the full amount, it would be approximately 10 percent of your check. I'm going to go into an example of this here in just a second. So for CSR employees, important to note again, fifty five percent, your spouse will receive fifty five percent of whatever benefit base you elect, and that's as low as twenty two dollars all the way up to your full pension. Now for FIRs employees, it's a little simpler. I said CSRs, it's a sliding scale. There's a number of different choices that you can make and you can slide that all the way. Like I said, from the full amount all the way down to twenty two dollars first, it's easier only two choices. You can choose to leave 50 percent of your pension to your spouse, or you can choose to leave twenty five percent to your spouse.
Speaker1:
Now those are the only two options 50 percent or twenty five percent. The cost for these are pretty simple. If you choose the 50 percent option, it's going to cost you 10 percent of your check. So to leave 50 percent to your spouse, it's going to cost you 10 percent while you're alive. If you want to leave twenty five percent to your spouse, it's going to cost you five percent of your check. Again, you need to at least select a minimal survivor benefit in order for them to continue the health insurance should you pass away first. Now important to note in both cases here, if you are married at the time of retirement, the government is going to automatically default to the maximum survivor benefit maximum. If you want to leave your spouse anything less than the maximum, they need to sign off on it, they need to sign the spousal consent form and have it notarized so that they are aware that they are getting something less than the maximum for CSRs. If you're leaving anything below fifty five percent of the full amount for FIRs employees, if you're leaving twenty five percent or nothing, they need to sign off on it. Ok. So again, cost for FIRs 10 percent of your check if you're leaving the maximum five percent if you're leaving the twenty five percent option. So let's look at a couple of examples here, and you can see exactly how this works. So using a CSRs employee now in other presentations that I've given, I've calculated pensions and things like that for here.
Speaker1:
We're just throwing some numbers out there. So let's say there's a CSRs employee and their pension check their total pension, their CSRs annuity was going to be seventy thousand two hundred and fifty dollars per year. Going forward, let's say they want to leave the maximum survivor benefit, which is fifty five percent of that seventy thousand to fifty. That means the surviving spouse will have received thirty eight thousand plus should the federal employee die first. But while that federal employee is alive, it's going to cost them two hundred and sixty two dollars and ninety two cents per month to pay for that amount. So if we're looking at this example right, you've got to weigh those odds or weigh those options. Is it worth them losing sixty seven, fifty five per year out of their paycheck for their spouse to get fifty five percent of their total pension? Maybe, yes. Maybe no. But again, if the federal employee health benefits are on the line, it can make the decision a little easier. Let's look at a first example here on the next slide. So this first employee, let's say they're going to make thirty three thousand per year in their pension. So it's a little less right because CSIS employees are relying on that one pension check. Firs is less. But let's say they're going to make thirty three thousand dollars a year in retirement, and they wanted to leave the maximum survivor benefit, which is the 50 percent option to their spouse.
Speaker1:
The spouse would then get sixteen thousand five hundred per year if the federal employee dies first. But while the federal employee is alive, their pension will be reduced by two hundred and seventy five dollars per month, or thirty three hundred dollars per year. So that's the way the options. Is it worth that reduction now? The government's not going to say this is what the cost is. They're just going to give you a reduced annuity. So a lot of times when you get a retirement estimate for both sexes or furs, it's going to say full annuity. No survivor benefits. It's going to say partially reduced annuity. It'll say fully reduced annuity now fully reduced annuity means maximum survivor benefit. And again, if you're married, that's the default option if you're married at retirement. That is the default option if you want to leave your spouse anything less than the maximum, I'll reiterate they need to sign off on it. So let's review Survivor Benefit Plan. What does this look like again? How does this affect you? It's not something you choose until you get to retirement, which need to be aware of what it is, how it works, and how it's going to affect you going forward because it essentially is a set in stone decision. I'll get into that in just a second. But you pay a premium, it says you reduced, you get a reduced pension, but you do pay a premium.
Speaker1:
There's a cost for this benefit, depending on which level of survivor benefit plan you choose. There's no cash value built up, right? There's no hidden place where this cost goes. This this premium that you're paying this fee or this deduction, your pension money does not go anywhere. It's just the money that's not coming to you. It's a permanently reduced pension. You choose this at retirement, and I said it's it's basically locked in. So there are some caveats. There are some ways this can be changed in a short window, but let's just say you choose the maximum survivor benefit option and five years down the road, you say, You know what? We don't need this thing anymore. Let's cancel it. Let's get back to full pension. We don't need to be paying you this anymore. You can't do it. You can't say, I want to get rid of it. You can't change it. It's set in stone. Opposite is true. Let's say you didn't choose it and you want to get it down the road. So you know we can really use that now. I didn't really think I needed it, but you know, let's get it. You can't change that down the road. But once you make that decision at retirement, you want to make sure that you are choosing the appropriate option. That's why I say this is a mistake that federal employees make because they're not educated as much on the consequences of this.
Speaker1:
That's where we come in or we want to provide the information to. It's not your fault. You just weren't taught all of this stuff. So making sure you choose the appropriate survivor benefit option for you now, lack of options in death because there is only one way that you can make a change, I should say two ways you can make a change over time. The first one let's say you were not married when you retired, you didn't choose a survivor benefit. Then you got married in retirement. Well, you can go at it. That's a life changing event. You can add it. Let's say you chose a survivor benefit and your spouse dies first. That's usually not something that we take into consideration. What happens if the spouse dies first? Well, then you can cancel your survivor benefit, but you don't recoup the money that was lost or the money that your pension was reduced by. You don't get that money back. You can get your full pension back. You cancel the survivor benefit, but you don't recoup the money that you put into this plan. Now, I say lack of options right in retirement. You can't just make willy nilly changes. There's lack of options there. Then in death, there's really not an option for the spouse the spouse just receives. It's not a death benefit. Like life insurance, they get a monthly payment for the rest of their life.
Speaker1:
Ok, and that payment is still taxable. We'll talk about some of the comparisons here of why I think this is a bad piece of life insurance, but your spouse will get a benefit and it will be taxable. Ok, so let's look at some of the things and some of the reasons why I'm going to say this is a bad piece of life insurance. You may agree with me. You may not, but how does life insurance work? Well, you pay a premium. There's a cost for it. And when you pay that premium now you have a death benefit. The insurance company will provide a death benefit to it. If you die, your spouse, your beneficiary or beneficiaries will receive what kind of payment a lump sum tax free payment. How does it work with the survivor benefit plan? You pay a premium. They may not call it a premium, but you pay a premium. There's a cost. There's a reduction in your pension, so you're paying a cost if you die. This is a death benefit. You die first, then your spouse gets a taxable monthly payment. There's no lump sum option and it's not tax free. It's a monthly payment for the rest of their life, whether they live a couple of months beyond you or they live forever. It's going to be a taxable monthly payment. It's really, I said, it's a bad piece of life insurance. Now what makes it attractive? I'm going to go back to the health insurance because it's contingent upon the health insurance.
Speaker1:
If you need to keep the health insurance in retirement, one hundred percent, that is your main focus. You'll be forced to take at least a minimal survivor benefit. But let's look at a comparison here. So I did a comparison, and these are just some, some key points that we're going to go over one by one of what the survivor benefit plan looks like the SBP column versus a private plan in actual life insurance plan. So instead of using the survivor benefit as your life insurance for your spouse, what if you can use an actual life insurance plan and how would it compare? Now, obviously, I've color coordinated this, so anything that is read is probably a negative thought, and anything that is green is more of a positive thought. You can do the math here and you can add it up and make up your own opinion. This is what we've seen in our experience working with federal employees and the options that are available to them. Should I choose a survivor benefit plan or should I set up my own plan for my spouse or for my beneficiaries, or for my family using a private plan? First thing contractual agreement. Now, the chances that Congress makes changes is slim, but they still can change. Changes to this plan can be made with or without your say. You may have groups that lobby against any changes or things like that.
Speaker1:
They can increase the cost for it. They can change the way it works. They can cut benefits that can be done at any time. There's no contractual agreement now with a private plan. It is a contractual agreement between you and an insurance company. It's written in plain English. There is no policy or agreement between you and the Survivor Benefit Plan. Managing costs. So the program is what it is right for both systems. Max payment is about, or max cost is about 10 percent of your pension and costs will increase as your pay increases, so you get cost of living. It's still 10 percent. Right. So just those costs can go up, relatively speaking over time if you're in a private plan. Generally, those costs are going to be locked in. That's part of the contractual agreement. You agree to pay this amount and the company is going to provide this amount of insurance. Ok. Cost savings. Now, with the survivor benefit plan, there are no good health discounts. There are no good health discounts. What does that mean? Well, with private life insurance, you need to qualify health wise, but the healthier you are, the cheaper the plan is going to be. And if you can prove that you're in the best of health, well, you can get the best rate possible and that rate can be locked in going forward, regardless of what happens to your health down the road if your health is good today.
Speaker1:
You can get that set up with a private plan now beneficiary on the survivor benefit plan. We say basically it's a spouse only benefit. I mean, ninety nine point ninety nine percent of the time. It is a spouse only benefit spouse only. There are some rare cases where a dependent child, somebody who is unable to take care of themselves, can be listed as a recipient of the survivor benefit or receive some sort of survivor benefit. But for the most part, this is a spouse only benefit. With a private plan, you can certainly name your spouse as the primary beneficiary. You have options there, you can name a primary, you can name contingents, you can name multiple people. This is not just for a spouse, it can be for your entire family. Most people would. Still, if we're doing a comparison list their spouse as the primary beneficiary, but you don't have to have options there. Family protection? Ok. So yes, the spouse is entitled to the full survivor benefit that is a positive thing within the survivor benefit plan. But again, it is a spouse only benefit, and in the private plan it could be the spouse that's named as a beneficiary. But the beneficiaries would be subject or have the ability to receive that tax free payment with the private plan. Then we come the taxes I've already kind of mentioned about the taxation of the survivor benefit plan. It is a taxable benefit, so the spouse may get a lifetime monthly payment no matter how long they live.
Speaker1:
Again, if it's a couple of months or many years beyond the federal employee that passed away. But that's payment is subject to tax within a actual life insurance plan. Those benefits are tax free. Now you can set it up to where it's a lump sum tax free payment, which is not an option that the survivor benefit plan has. There's no lump sum option say you're the spouse and you say, You know what? My health isn't that great or I just want to get all the money. Now you don't have that choice with the survivor benefit plan, with the life insurance you do. There are plans that you can set up where you can have the option to have a lump sum tax repayment or a tax free monthly payment for the rest of the spouse or the beneficiaries life. You have more flexibility there, but whatever payment you choose with the private plan, it's going to be tax free now. Proof of insurability This is where the private plan has a knock against it because with the survivor benefit plan with the government, you don't have to provide proof of insurability. It's not actual life insurance, right? Even though I think it mimics a bad piece of life insurance, you don't have to prove your health in order to elect that, and you don't have to prove your spouse's health in order to elect it.
Speaker1:
But with a private plan, you, as the federal employee, need to be in good enough health to get the plan in order for it to be in place. So if you're in relatively good health, or even if it's just average health, you should be able to qualify. If you're in poor health and you wouldn't qualify for life insurance, then unfortunately, this may not be an option for you, and you have to choose between the survivor benefit plan or nothing. Reducing coverage So as I mentioned, the Survivor Benefit Plan, that choice is pretty much irreversible. You're not going to be able to reduce coverage, eliminate coverage, get rid of coverage beyond kind of an initial window. But as I said an example, you can't go five years down the road and say, Hey, let's reduce down. If I'm a first employee, I want to reduce from 50 to twenty five percent or I want to eliminate it entirely. You cannot make that change for any reason. It's basically an irreversible choice. It's set in stone from the moment you made it when you're retired. But if you had a private plan, you can make changes alterations. This is a customizable plan. You can make changes along the way. You can reduce coverage, you can apply for more coverage. You can do almost anything you want. You could change your beneficiaries at any point, things like that. Right. This is a flexible and customizable plan. Coverage limits. So with the survivor benefit plan, the amount is limited.
Speaker1:
The government basically says one person can live on half as much as two. So the most as a firm employee that you can get is 50 percent. The most as a CSR employee is fifty five percent of your pension. Well, what if your spouse needs more than that? What if they want the full pension amount? What if they want something that is just a customizable number that the government is not offering? It's not available. You can set that up with a private plan. You can say we need this amount of coverage. We need this amount per month. If I the. At our employee died first, you can set that up. Ok, that is not a problem and then family needs. We just talked about basically the coverage limits. It may not be fully covered. The family need may not be fully covered with the survivor benefit plan. Up to that 50 percent or fifty five percent, it may not be covered with that plan, but with a private plan, we can customize the deal and you can make changes. Like I said along the way, you can make modifications, you have choices, you have flexibility, you have options. Now the caveat is, and the only negative, in my opinion, is you have to qualify health wise. Ok, but we can set up there's so many different types of plans out there, some that are specifically designed to mimic the survivor benefit plan. So you can set up basically a private version of that and and have a plan that builds equity.
Speaker1:
Let's say that you're a federal employee, and instead of going with the Survivor Benefits Plan, you decide to set up your own private plan. And let's say that it mimics pretty much exactly what the government plan would do as far as payments to your spouse. Now, upon your death as a federal employee, I don't want to kill you off first, but let's say you died first. Your spouse can choose between a lump sum tax free benefit or a tax free monthly benefit for the rest of their life. They have the flexibility and the option to do that. Now, let's say the opposite happens. Let's say you choose the private plan, you get it all set up and your spouse dies first. Well, reminder with the government plan, you can cancel it, regain your full pension, but you do not get back any of that money that you put into the plan with a private plan. It can build equity over time so that money is not just gone. That money that you put into the private plan could be building up cash within the policy, within the life insurance. And if your spouse dies first, you can do really one of two things you can change your beneficiaries, which is not possible with the survivor benefit plan with the government and keep the plan in place. Change your beneficiaries. Now the money can go to somebody else, or you can cancel the policy, surrender it and regain that equity.
Speaker1:
Get back some of the money that you put into it. Now, it may not be a full return on your investment, right? Return on all the money you put into it, but at least it's some money back which you do not get with the government plan. So just the flexibility, the options, the customization, things that you can do that you cannot do with the survivor benefit plan. I review and I go back, though the big hook, the thing that still makes the government plan look attractive in the most cases that I talk to federal employees about is the health benefits. So I will reiterate if you one hundred percent need to make sure that your spouse collects or is able to keep the health insurance in retirement. If you were to die first, you need to at least elect a minimal survivor benefit. So thank you for joining us for this episode. When we're talking about survivor benefits and making sure that you choose the right option, avoiding mistake number seven that we have in our top ten mistakes. If you're not familiar with all of the top 10 mistakes, go back and watch our previous episode where we outlined the top 10 mistakes that we see federal employees make. But this is again was about survivor benefits. Hope you found the information valuable. Visit us on our website and be sure to catch us on a future episode and.
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