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