While it may be tempting to turn down the offer of a survivor annuity and either invest the extra money or purchase an insurance policy to make up the difference, very few retiring employees do it. That’s because the government’s financial deal is hard to beat.
However, it does come at a cost, which varies according to which retirement system you are under.
FERS—If you elect a standard survivor annuity under FERS when you retire, the default amount is 50 percent of your basic annuity before reductions are taken. You can elect a 25 percent survivor annuity or no survivor annuity, but only with your spouse’s written consent.
Your own basic annuity is reduced by 10 percent for a full survivor annuity and by 5 percent for a 25 percent survivor annuity.
CSRS/CSRS-Offset—A full survivor annuity benefit for your spouse amounts to 55 percent of your basic annuity. For this benefit, your basic annuity is reduced by about 10 percent. A partial survivor benefit can range from $1 a year up. Or you can decide on no survivor benefit. You can make less than a full election with your spouse’s written permission. If a less than full survivor benefit is elected, the amount of the reduction in your annuity is proportionately less.
Insurable Interest Annuity—An alternative to standard survivor benefits is the “insurable interest” annuity. This may be provided to anyone with a financial interest in the retiree, which is presumed for certain relationships but must be proven for others. It is sometimes provided for a spouse when, for example, a court order has directed survivor benefits to a former spouse. Under all systems, an insurable interest annuity is 55 percent of the retiree’s annuity after it has been reduced by a factor of 10-40 percent, according to the age of the designated survivor in relation to that of the retiree.
Under all systems, a survivor annuity generally must be elected in order for survivors to remain eligible for Federal Employees Health Benefits program coverage. If the designated spouse predeceases the retiree, the reduction in the annuity is ended, but there is no refund for the prior deductions.
Note: If you are divorced and a court has given a survivor annuity to your former spouse, you may still elect a survivor annuity for your current spouse. Doing this can protect him or her if your former spouse loses entitlement to that annuity, for example, by remarrying before age 55.