How to elect an insurable interest survivor annuity

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If you are a retiring Civil Service Retirement System or Federal Employees Retirement System employee in good health who wants to provide a federal survivor benefit to a person who wouldn’t otherwise be entitled to receive one, you can elect an insurable interest annuity. “Insurable interest” is an insurance term that applies to a person who would benefit financially by your continuing to be alive.

According to the Office of Personnel Management, those who are presumed to have an insurable interest in you are your spouse, a blood or adoptive relative closer than a first cousin, a former spouse, someone to whom you are engaged to be married, someone with whom you would be considered to be in a common-law marriage in a place that recognizes such arrangements, and a same-sex domestic partner. If you’d like to provide an insurable interest annuity to someone who doesn’t fit into one of the above categories, you can submit affidavits from people who have personal knowledge of your relationship.

To be eligible to elect an insurable interest annuity, you’ll need to be in good health, which you prove by having a medical exam.

The cost of an insurable interest annuity depends on two things: the difference between your age and that of the beneficiary, and the amount of your annuity that can be used as a base. The latter will vary depending on whether there is anyone else who has an entitlement to a survivor benefit, such as a current or a former spouse, and how much of your annuity you intend to provide.

To compute the reduction in your own annuity, you need to determine how much of it is available. If there are no other claimants, that would be your entire base annuity before any deductions are taken out. Multiply the figure you come up with by the following percentages: 10 percent if the survivor is the same age, older than, or less than 5 years younger than you; 15 percent if 5 to 9 years younger; 20 percent if 10 to 14 years younger; 25 percent if 15 to 19 years younger; 30 percent if 20 to 24 years younger; 35 percent if 25 to 29 years younger; 40 percent if 30 or more years younger.

The product will be the amount by which your own annuity will be reduced. Regardless of the size of that reduction, a full benefit will always be 55 percent of your own annuity after it has been reduced to provide the insurable interest annuity, while a partial benefit will be 55 percent of the base amount you elect.

To make it simple, here are two examples where the retiring federal employee is either single or is not required to provide a survivor annuity for either a current or former spouse.

Example 1: Maximum insurable interest annuity. Unreduced annuity: $60,000. Retiree’s age: 58. Beneficiary’s age: 56. Annuity reduction: $6,000 ($60,000 times 0.10). Retiree’s new annuity: $54,0000 ($50,000 to $6,000). Amount of insurable interest annuity: $29,700 (55 percent of the annuity base of $54,000).

Example 2: Modest insurable interest annuity. Unreduced annuity: $60,000. Amount of annuity elected as the base: $20,000. Retiree’s age: 58. Beneficiary’s current age: 56. Annuity reduction: $2,000 ($20,000 by 0.10). Retiree’s new annuity: $58,000 ($60,000 to $2,000). Amount of insurable interest annuity: $11,000 (55 percent of the annuity base of $20,000).

It’s important to note that it won’t provide the survivor with coverage under the Federal Employee Health Benefits Program, unless the survivor is entitled to that benefit by being covered under the family option of your FEHB plan when you die.

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