Insurable Interest-What's That?

When you go to retire, you can elect a spousal survivor benefit. That’s pretty common knowledge and I’ve written about it before.

But, can you make someone else, who is NOT a spouse, the beneficiary of your annuity? Well, yes you can, but as always, it’s complicated.

You know how when you come up with a plan or a project for work? And it’s unnecessarily complicated? So you work on it, cutting and streamlining things until it makes logical sense? And everything is as simple as you can make it? And your coworkers go, “Wow, good job!”

Yeah, the government doesn’t do that. The government pretty much does the exact opposite of that. There’s no doubt in my mind Rube Goldberg produced a “How to Government” book at some point, and it’s being faithfully consulted in some dingy basement somewhere. (I know, I know, just Google the guy. You’ll see why the reference is applicable).

What are we talking about exactly here?

If you take a gander at your Standard Form 3107 Application for Immediate Retirement FERS, you’ll see a section you cannot leave blank when you submit your retirement packet. Section D Annuity Election. I won’t rehash my other paper, but your spouse can get 0%, 25%, or 50% of your annuity. You make that election in Section D of 3107.

But what if you don’t have a spouse, can a kid not get a survivor benefit? I mean, unless colleges start offering a Tik Tok major, he might need some reliable income.

The short answer is yes, you can elect for someone other than a spouse to get some money when you shuffle off this mortal coil. But there’s some Goldbergy-like hoops to jump through. You can’t just name Jimmy the hash slinger down at the local Waffle House. So here’s the deal.

1. You have to be in good health and retire for reasons other than disability. If you’ve got 3 weeks to live, OPM doesn’t want to pay money out if they aren’t going to collect from you first.

2. An insurable interest is someone who reasonably expects to benefit from you living. Like, they need you to be around. And not just because of Waffle House tips. We’re talking legit family here. Insurable interest is presumed for:

   Spouse, ex-spouse, relative closer than first cousin (by blood or adoption), an engaged person, and a common-law marriage type situation. Other people may qualify but you’ll have to prove it with affidavits and so forth.

3. You can only name 1 person as a beneficiary. No contingencies.

4. You can’t elect one of these after you retire.

5. The cost structure is dizzyingly complicated, even by government standards. Read on.

6. The benefit to the insurable interest person is 55% of your annuity. But only after your annuity has been reduced by what this benefit is going to cost you. Um…huh? Let’s break this down. First of all, just understand that the person that gets the money when you die, gets 55% of your net annuity amount after the cost of the annuity. Ok, so what’s the cost?

7. Depends on how old the other person is. See below:

• If the beneficiary is less than 5 years younger, the same age, or older than the retiree, the benefit costs 10% of the employee’s annuity

• If the beneficiary is 5-10 years younger, it costs 15% of the annuity

• 10-15 years younger, it costs 20% of the annuity

• 15-20 years younger, 25% of the annuity

• 20-25 years younger, 30% of the annuity

• 25-30 years younger, 35%, and

• 30 or more years younger, it will cost the employee 40% of their annuity.

Let’s do an example:

Greg is retiring and wants to elect a survivor benefit for his son. The kid was born when Greg was 28, so he’s 28 years older than the beneficiary. That will cost Greg 35% of his annuity. If Greg’s annuity is $4,000 a month, he’ll have to pay $4,000 x 35%, or $1,400 a month. Yikes! That’s a hit!

Now, what does Greg’s son get? He gets 55% of Greg’s annuity after the cost has been deducted. So we start with $4,000, deduct the cost of $1,400, leaving $2,600. The son gets 55% of $2,600, or $1,430 a month.

So, Greg pays $1,400 a month for his son to get $1,430 a month? Seems like an expensive deal. But you have to remember the kid is young so he’ll get the money for a very long time, presumably. And with COLA’s, it can continue to grow.

That’s a pretty straightforward example. Remember to first find the cost, then deduct it from your annuity. Then multiply the remaining number by 55% for the benefit.

Spouses

Let’s talk about spouses. They make things a little difficult. (Like, don’t they always?!).

If you have an ex-spouse that was already awarded a regular spousal annuity (not one of these insurable interest deals, but a regular spousal survivor benefit), of the full amount, i.e. 50%, remember that the new spouse can’t get a spousal survivor benefit. 50% across all the spouses is all that’s allowed. If spouses one and two got awarded a total of 50% of your annuity, spouses three, four, and five are out of luck.

(At the risk of going off the rails a little bit, you probably should elect a survivor benefit for your current spouse anyway since they could get continued FEHB coverage, even if a former spouse already ate up the 50% cash part of the survivor benefit.)

Except that one of them can be named as an insurable interest. Let me be clear on that—you can have a former spouse awarded a 50% survivor benefit, and you can still elect to have your current spouse receive a benefit under the insurable interest election. It’s gonna cost you but you can do it. Remember the 50% spousal survivor benefit costs 10% of your annuity. If your current spouse is 8 years younger than you, that’s going to cost you another 15% of your annuity.

I won’t weigh in on whether or not it’s wise to have so many spouses and ex-spouses standing to benefit from your death. I’ll let you reach that conclusion yourself.

Let’s Simplify the Spouse Structure

Alright, let’s say you only have ever had one spouse—and you’re still married to them. You obviously can elect the 5% deduction for the 25% spousal benefit, or the 10% deduction for the 50% spousal benefit. This is the standard, more commonly known spousal survivor benefit. But what if you want your spouse to have a higher percentage? You could choose to elect to make your current spouse a beneficiary under the insurable interest provision. If they are almost the same age as you, you’ll have to pay 10%, and they’ll get 55% of the annuity after the cost of the 10%. Let’s do some math:

Insurable Interest Example:

Jack and Diane are still married all these years later after that scandalous Tastee Freeze incident. Jack’s annuity is $4,000 a month. Diane is the same age as him and he elects to make her an insurable interest. 10% is his cost because they are the same age. $4,000 - 10% ($400) = $3,600. Diane gets 55% of $3,600, or $1,980.

Spousal Survivor Benefit Example:

Jack gets $4,000 a month and elects the full 50% survivor benefit for the cost of 10%. Jack pays $400 a month. Diane gets 50% of the annuity (or $2,000) in this example when Jack passes away.

In both instances, Jack pays the same. But in the spousal survivor benefit, Diane gets more. Why would a spouse do an insurable interest election? I don’t think many would. Particularly if the spouse is significantly younger than the retiree. Perhaps there is some advantage to it that I am missing?

Maybe someone out there knows?

FEHB Coverage

Maybe an astute person out there is wondering if the insurable interest election comes with continued FEHB coverage if the annuitant dies. Continued FEHB coverage upon the death of an annuitant is for a spouse or ex-spouse. So, yes it looks like it covers a spouse under the insurable interest election. But it would not cover, say a brother, under the insurable interest election.

Summary

The insurable interest election is certainly an uncommon aspect of FERS. But every once in a while there are uncommon situations out there that can be helped with one of these unusual provisions, so it’s worth at least mentioning it.

I’m a bottom line guy. So what’s the bottom line? There is a way to provide a survivor annuity for someone other than a spouse. But it can be very expensive as you can see. Perhaps it might be cheaper to keep your maximum FERS annuity check, and provide for the beneficiary in some other way? Like making them your TSP beneficiary, for example. Or putting money aside in a mutual fund every month for them.

Regardless, if you’re thinking about one of these, make sure you are really diligent in your research!

Further Research

OPM Handbook, Chapter 52, Page 11

5 CFR 831.613 (Federal Law Covering Insurable Interest Election)