Retirement & Financial Planning Report

Under federal retirement policy, someone retiring can provide an “insurable interest” annuity to someone other than a spouse as a way of providing survivor protection. Most commonly, these are provided by a married person at retirement who has a former spouse eligible for a survivor annuity due to a divorce court order, but they can be used in other circumstances as well.

An insurable interest is presumed to exist if the retiring employee names one of the following individuals as the beneficiary for the insurable interest annuity:

* A blood or adoptive relative closer than first cousins;
* A former spouse;
* A person to whom the employee is engaged to be married;
* A same-sex domestic partner meeting certain standards; or
* A person with whom the employee is living in a relationship that would constitute a common-law marriage in jurisdictions that recognize common-law marriages.

In addition, such an interest is presumed to exist for a current spouse, but in the large majority of cases retirees choose a regular spousal annuity, since an insurable interest annuity costs more in terms of the reduction to the annuitant’s own benefit–and that reduction, unlike the spousal reduction, grows larger if the covered person is more than five years younger than the sponsor.

If the person named is not one of those listed, the employee must submit affidavits from one or more persons with personal knowledge of the named beneficiary’s insurable interest in the employee.

The affidavits must set forth:
* The relationship, if any, between the employee and the person named to receive the annuity;
* The extent to which that person is dependent on the employee; and
* The reasons why he or she might reasonably expect to derive financial benefit from the employee’s continued life.

As with a standard survivor annuity, electing an insurable interest annuity causes your own annuity to be reduced. However, there’s a difference: the reduction will vary according to the difference between your age and the age of the named person–ranging from 10 percent for someone who is your age or older, to 40 percent for someone 30 or more years younger.

On your death, that person would receive 55 percent (under both FERS and CSRS) of your reduced annuity. If the named person should die before you do, your annuity will be restored to its full amount, on your request to OPM.