The Federal Employee Retirement System (FERS) insurable interest annuity is a variant form of the FERS survivor benefit. Under the federal retirement policy, employees retiring for reasons other than disability, may provide a survivor annuity to someone with an ‘insurable interest’ as a way of providing survivor protection. Most commonly, survivor benefits are provided to a spouse (or a former spouse in the case of a court order) at retirement.
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 a first cousin (son, daughter, brother, sister, or parent);
- A spouse;
- 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 a jurisdiction that recognizes common-law marriages.
If the person named by the employee is not one of those listed above, the employee must submit affidavits from one or more individuals with personal knowledge of the named beneficiary’s insurable interest in the employee. The affidavits must identify:
The relationship 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 the person might reasonably expect to derive financial benefit from the employee’s continued life.
| Age Difference Between Retiring Employee and Insurable Interest | Reduction in FERS Gross Annuity |
|---|---|
| Insurable Interest is Older, Same Age, or Fewer than 5 years younger than the retiring employee | 10% |
| Between 5 and 9 years younger | 15% |
| Between 10 and 14 years younger | 20% |
| Between 15 and 19 years younger | 25% |
| Between 20 and 24 years younger | 30% |
| Between 25 and 29 years younger | 35% |
| 30 or more years younger | 40% |
Benefit:
The actual survivor annuity benefit associated with the insurable interest survivor annuity is equal to 55% of the reduced FERS annuity (FERS gross annuity amount at the time of death, less the survivor annuity cost).
In all cases, the insurable interest automatically ends if the insurable interest dies, if the employee marries the insurable interest and elects to provide a spousal benefit, or if the insurable interest is the employee’s spouse and the employee elects to provide a spousal survivor benefit.
Example:
Mary, age 57, a widow, retires from Federal service with 32 years of FERS service and is scheduled to receive as FERS gross annuity of $40,000. She elects to give her daughter, Susan, age 25 a FERS insurable interest survivor annuity. Below is the cost to Mary, her net annuity amount, and the benefit to Susan when Mary dies.
- Cost: Since there is more than a 30-year age difference between Mary and Susan, Mary’s cost for giving a survivor annuity to Susan is 40% of $40,000, or $16,000. The $16,000 cost never changes even when Mary’s FERS annuity starts to receive COLAs.
- Net FERS annuity for Mary: Assuming no COLA is applied, Mary’s net FERS annuity is $24,000 ($40,000 less $16,000). When Mary’s FERS annuity begins to receive annual COLAs, her original $40,000 gross FERS annuity will increase each year with COLAs, but the original cost to give the insurable interest survivor annuity will remain at $16,000.
- Benefit Amount: The insurable interest benefit amount that Susan will receive is 55% of Mary’s net FERS annuity. If Mary were to die at age 60 with no COLAs, then Susan will receive $13,200 (55% of $24,000).
Something To Think About:
Instead of a FERS Insurable Interest Survivor Benefit, the retiring employee may consider naming the insurable interest as a beneficiary to his/her TSP account or FEGLI Life Insurance. In doing so, the FERS employee would not have any reduction in his/her own annuity and the employee can name any number of beneficiaries for their TSP Account or FEGLI benefits.