This article was originally published here
Here are some important things to keep in mind regarding your federal benefits if you believe your spouse will need your health insurance in case you die before them.
Your federal health insurance is an important consideration when deciding what type of death benefits you’ll need to have set for your spouse in retirement.
You must leave some level of survivor benefits for your spouse to continue on your Federal Employees Health Benefits (FEHB) plan after you die. Because of this, most federal employees carry at least the minimal amount of survivor annuity benefit, even if the spouse won’t need the income replacement after death. If your spouse needs this health insurance, you should take at least the minimal survivor benefit.
On the other hand, if you want to leave no survivor benefit and instead get private life insurance to replace your income after your death, there are two essential things to consider.
The first is, as previously said, your spouse’s health insurance. If your spouse relies on your FEHB, you should consider purchasing at least the minimal survivor annuity.
Second, can you even obtain private life insurance? You cannot simply assume that you’ll be able to purchase whatever private coverage you choose. You must first qualify.
Life insurance is acquired with your health first, then with your money. Poor health can lead to higher life insurance premiums, and you might even be denied coverage, making the survivor annuity the most cost-effective alternative in some cases.
Good health can have the opposite impact. These criteria do not apply to survivor annuities; you’re automatically eligible for coverage at a standard 10% cost.
There’s no simple method to evaluate which of the different levels of survivor annuity benefits and life insurance alternatives is best for you, as it ultimately boils down to personal preference. That is why we recommend hiring an insurance specialist to conduct a needs analysis for your particular situation.
Let’s consider the case of Kevin, who, like many federal employees, wishes to ensure that his family is provided for in the event of his death.
As a FERS employee, he’ll get an annuity when he retires at the age of 58. He is debating his survivor annuity options for his wife, Sara, who is also 58. He understands that if he doesn’t get a survivor annuity, he will get a larger annuity benefit for the rest of his life. Still, he also doesn’t want Sara to struggle if he dies before her or to be left without federal health insurance.
As a FERS employee, Kevin can choose 50%, 25%, or 0%. For the example, we’ll assume Kevin opts for the 25% option for the purpose of health benefits.
Also, let’s suppose Kevin has a high-three of $110,769 with 32 and a half years of service when he retires.
Kevin may be able to take the larger annuity while still providing for his wife’s security in the case of his death.
He can use a technique known as pension maximization, which involves using life insurance to replace a portion of Kevin’s annuity at his death. That necessitates estimating how much Kevin is likely to pay if he chooses private insurance over the survivor benefit option.
The process of maximizing your pension begins with evaluating the future value of your spouse’s survivor annuity. In Kevin’s example, we multiply $750 by a fixed number depending on Sara’s age. In this way, we can calculate the future value of Sara’s survivor benefit, which is roughly $150,000. (We’ve left out the calculation since it’s complicated, varies by individual, and only offers an estimate; you should see an expert for this.)
Once he has determined the amount of the federal annuity, he might be able to replace it with a combination of term and permanent life insurance policies. By looking at the premiums, Kevin can compare the costs of private plans to the expenses of the survivor annuity.
Analyze life insurance products carefully and confirm the length of time the coverage is guaranteed. As a bonus, several life insurance companies include various types of long-term care coverage in their policies.
Blindly accepting the default survivor benefit isn’t a good idea. You’re in control and not OPM.
Your surviving spouse will most likely need your pension income. Do your homework and be a savvy customer by being aware of all of your alternatives. Understand how your survivor annuity decisions will influence your spouse’s federal health insurance coverage. No matter whether you pay for life insurance premiums, take the pension cut that comes with survivor benefits, or both, know that it won’t be cheap.