Edward A. Zurndorfer, CFP

Before retirement, a federal employee may elect a reduced annuity (CSRS or FERS, or both annuities in the case of a "trans" FERS employee) in order to provide an insurable interest benefit to a current or former spouse or to another person who depends on the employee for support.

Recent My Federal Retirement columns discussed spousal survivor annuity benefits (CSRS and FERS). This column discusses survivor annuity benefits for someone other than a current spouse. The column will also discuss what happens in the event no survivor annuity is payable.

The discussion focuses on providing a survivor annuity benefit for an "insurable interest." For purposes of a survivor annuity benefit, everyone is considered to have an insurable interest in their own lives as well as the lives of their spouses and dependents. For survivor annuity benefit election purposes, an insurable interest is presumed to exist if a retiring employee names any of the following individuals as an insurable interest beneficiary:

1. a spouse;
2. a blood or adopted relative closer than first cousins. This includes children, siblings and a parent;
3. a former spouse;
4. a person to whom the employee is engaged to be married; or
5. a person with whom the employee is living in a relationship that would constitute a common-law marriage in a jurisdiction that recognizes common-law marriages.

But there are important differences between naming a spouse (or a former spouse in cases of a court order) as the beneficiary of an insurable interest survivor annuity versus one of the other named eligible individuals. If an employee is married, or was married and had a court order demanding survivor annuity benefits for a former spouse, then the former spouse must formally consent to a survivor annuity being giving to someone else.

An employee who names an insurable interest other than a spouse must be in good health and retire for reasons other than disability. The employee is responsible for arranging and paying the cost of any medical examination. A report of the examination must be included with the retiring employee's application for retirement.

If the retiring employee names an individual as a survivor annuitant who is not included in the above list, then the retiring employee must also submit affidavits with his or her retirement application from one or more individuals with knowledge of the employee's insurable interest in that individual. The retirement application forms are Standard Form (SF) 2801 for CSRS-covered employees and SF 3107 for FERS-covered employees. The affidavit should state the relationship between the employee and the insurable interest, the extent to which the person named is dependent on the employee and the reason why the person named as a survivor annuitant might reasonably expect to derive financial benefit from the retiring employee's continued life.

In order to provide an insurable survivor annuity benefit, the annuitant's CSRS or FERS annuity will be reduced. The amount of the reduction will depend on the age difference between the annuitant and the insurable interest. This is different from a spousal survivor annuity because when it comes to a spousal survivor annuity, the cost to the annuitant (in the form of a monthly reduction in his or her gross annuity) is not affected by any difference in the spouses' ages.

At the annuitant's death, an insurable interest survivor annuitant will receive 55 percent of the reduced benefit (CSRS or FERS). This is different from a spousal survivor annuity in that a surviving spouse receives a maximum 55 percent (CSRS) or 50 percent (FERS) of the unreduced benefit. The following table summarizes.

The following examples illustrate the cost and benefit of an insurable interest survivor annuity:

Example 1.

Jan, age 57, is a FERS-covered employee who will be retiring in July 2009. Jan is a single individual who is supporting her mother, age 89. Jan decides to give her mother an insurable interest survivor annuity. Jan's gross FERS annuity will be $40,000. In order to give the insurable interest survivor annuity, Jan's gross annuity will be reduced 10 percent of $40,000 or $4,000. Jan's FERS annuity will therefore be reduced by $4,000 to $36,000. Should Jan pass away, Jan's mother would receive a survivor annuity equal to 55 percent of $36,000, or $19,800.

Once Jan receives cost-of-living adjustments or COLAs, the insurable interest survivor annuity will also receive the same COLAs.

Example 2.

Tom, age 58, was a CSRS-covered employee who retired Feb. 1, 2009. Tom was approved for giving an insurable interest survivor annuity to his partner, age 33. Tom's gross annuity before the reduction for the insurable interest survivor annuity was $75,000. Tom's gross annuity will have to be reduced by 35 percent in order to give his partner, who is 25 years younger, a survivor annuity benefit. This means 35 percent of $75,000 or $26,250. Tom's CSRS annuity will then be $75,000 minus $26,250 or $48,750. At his death, Tom's partner will receive a survivor annuity of 55 percent of $48,750 or $26,812.50. Both the CSRS survivor annuity and the CSRS annuity are increased annually by COLAs.

The insurable interest survivor annuity automatically ends if the insurable interest dies, if the annuitant marries the insurable interest and elects to provide a spousal benefit, or if the named person is the annuitant's spouse and the annuitant changes the election to provide a spousal survivor benefit.

If an employee or annuitant dies leaving no survivors who qualify for a survivor benefit, then the employee's contribution to the CSRS or FERS retirement fund will be paid as a lump-sum according to the employee's or annuitant's beneficiary designation. Forms SF2808 (CSRS) or SF 3102 (FERS) need to be filled out, signed and dated in order to make these beneficiary designations. The forms should be submitted to an employee's Personnel or Human Resources Office prior to the employee's retirement. Both forms may be downloaded from www.opm.gov.

If a valid beneficiary has not been designated, then OPM will make payment according to the following order of precedence:

1. Widow or widower
2. Children
3. Parents in equal shares or the entire amount to the surviving parent
4. Determined by the Executor of the deceased through the deceased's Will.
5. The next of kin determined by OPM to be entitled under the laws of the domicile of the deceased on the date of death.

About the Author

Edward A. Zurndorfer is a Certified Financial Planner and Enrolled Agent in Silver Spring, Maryland. He is also a registered representative with Multi-Financial Securities Corporation (Branch A9X), member FINRA/SIPC, also located in Silver Spring, Maryland