Blog Created By: Brandon Bradley

 

Did you know your FERS/CSRS Annuity won’t automatically go to your family? Plan early or pay MUCH more in retirement.  

 

Having worked with federal employees for over 24 years, I’ve learned that the vast majority don’t fully understand how to calculate their pensions or what happens after they pass. The lack of knowledge isn’t surprising as most agencies don’t provide retirement education until employees are about five years away from retirement; therefore, most people don’t find out about the crucial decisions until very late in their careers. That can be a very COSTLY mistake!

 

This mistake can easily be avoided by simply finding a retirement/benefits specialist so you can understand your options and prepare as early and as young as possible. There are some pitfalls to avoid in retirement, and the sooner you learn about them, the sooner you can prepare. Proper planning can save you tens of thousands of dollars, and you’ll be providing much better protection for yourself and your loved ones.

 

Insuring Your Pension

As the subject line states, your family won’t automatically receive any of your FERS/CSRS Pension if you pass away after retirement. If you weren’t already aware of this, I’m sorry to be the messenger of bad news as, this is usually a bit shocking for most people. You work for 30+ years, pay into your retirement every pay period, and if you pass away a day or a month into retirement, no one automatically gets your pension. The only way to leave monetary benefits to your loved ones is by insuring that pension, and there are only two options by which you can do so.

 

Option 1: Federal Government’s Survivor Annuity Benefit (SAB).

 

Positives

1. Guaranteed Approval – No Medical Questions or Underwriting.
2. Guaranteed for Life – Coverage lasts as long as the retiree does.

 

Negatives

1. High Costs
   1. Annual premium costs up to 10% of retiree’s pension.
   2. 10% per year x 10 years = 100% of one pension. Every 10 years costs you one entire year of your pension- you keep 9 years of pension benefits, and the government keeps one.
2. Low Benefit Value.
   1. Maximum of 50% of your pension available to your dependents. Not usually enough money for most surviving spouses.
   2. Taxable Trickle – Benefits paid to the beneficiary are taxable and paid monthly until the beneficiary passes away.
3. Spouse Is the Only Beneficiary – Unless you have a minor or disabled child(ren) (SSA Verified).
4. Benefits Not Guaranteed to Pay Out – If your spouse passes away before you and you don’t have a minor or disabled child, the benefit will never be paid to anyone. In addition, all of the premium you’ve paid over your retirement years will have been wasted.
5. Insufficient Benefit – 50% of your pension (taxable) is the maximum your spouse will receive, which is often not enough to cover the household expenses. This issue is further compounded by the additional reduction to the household’s Social Security benefits when a retiree passes away.

 

 

Option 2: Private Life Insurance.   

 

Negatives

1. Medical Underwriting – Requires underwriting and approval by an insurance company.
2. Guaranteed for Life? – Although many policies guarantee life coverage, some people choose a less-expensive policy, such as a “Term” life policy. Term policies guarantee coverage for a specific period of time such as 10, 20, or 30 years, which might not be long enough.

 

Positives

1. Lower Cost – Due to medical underwriting, you must qualify for a life insurance policy, which often results in lower costs than the government’s Survivor Annuity Benefit.
2. Guaranteed for Life – Coverage and premium can be guaranteed level with no increases up to age 121.
3. Tax-Free Lump-Sum – Death Benefits paid to the beneficiary(ies) as a tax-free lump-sum payment instead of a taxable, monthly trickle. The lump-sum benefit can then be left to other beneficiaries such as children, charity, etc.
4. Sufficient Benefit – You choose the amount of coverage your family requires, so there’s no financial stress.
5. Living Benefits Available – Many policies have not only a death benefit but additional living benefits such as the following:
   1. Terminal Illness – If diagnosed with a terminal illness, the policy pays a portion of the death benefit to you while you’re living.
   2. Critical Illness – Pays a portion of the death benefit if you are diagnosed with a critical illness such as cancer, stroke, heart attack, renal failure, paralysis, loss of limbs, loss of eyesight, ALS, etc.
   3. Chronic Illness (aka, Long-Term Care Insurance) – Pays a portion of the death benefit if you qualify for long-term care benefits.
   4. Return of Premium – If the policy is canceled, you receive all or a portion of the premium paid into the policy.

 

Example: Age 62 Retiring with a pension of $42,000 per year under FERS.

 

Option 1: Federal Government’s Survivor Annuity Benefit (SAB).

 

COST	BENEFIT TO SPOUSE
$4,200 per year/$350 monthly	$21,000 per year/$1,750 monthly (taxable)
REMINDER: Spouse is the only beneficiary unless you have minor or disabled children.

 

 

Option 2: Private Life Insurance Purchased at Age 42.

 

COST	BENEFIT TO SPOUSE/CHILDREN/CHARITY/OTHER
$2,076 per year/$173 monthly	$500,000 tax-free, lump-sum
Savings to Retiree = $177 monthly or $42,480 over 20 years. Living Benefits for Retiree – (See Above.) More Income for Loved Ones. Return of Premium if Cancelling.

 

 

So which option is appropriate for you? Contact a United Benefits specialist to get a personalized review, protect your family, and maximize your pension.

Example above is hypothetical and for illustrative purposes only.  Every individual is unique with different circumstances.  Consult a retirement/benefit specialist to learn more before taking any action.

 

Schedule a One on One Consultation