How the Survivor Benefit Plan Works for You (…or Does It?)

The Survivor Benefit Plan (SBP) can help you ensure your spouse is financially secure after your death. And while you may think that electing the SBP solves your problems, it’s crucial to understand how it works and what it covers (and what it doesn’t) before making a decision.

How the survivor benefit plan works

In retirement, the Survivor Benefit Plan allows a federal employee to protect a portion of their monthly retirement income for another person. The plan ensures that a portion of a federal employee’s pension continues to be paid to a beneficiary, usually a spouse, after the retiree’s death.

On the retirement application, an employee will elect their survivor benefit designee when they complete the necessary paperwork. Remember, however, that once an employee makes the selection, there is a very limited window to change it.

Eligibility

Unlike private health insurance, you are not required to complete a health screening to qualify for the SBP; you automatically qualify for it. You are only required to make the election on your retirement paperwork, which is a tremendous advantage of this plan.

What are the survivor benefits for a current or a former spouse?

Your current spouse is entitled to receive the maximum benefit allowable, which is 50% of your pension. If your spouse agrees to receive less than 50% of your pension, they must provide their notarized consent.

If your current spouse wishes to keep the Federal Employee Health Benefit Plan (FEHB) after you die, you must have indicated that either 25% or 50% of your pension is to be protected through the Survivor Benefit Plan.

If you were to elect zero, your spouse can only keep FEHB while you are living in retirement. Once you die, they will immediately be removed from FEHB.

If you have a former spouse, you only want to elect them as a survivor annuitant on your retirement application if you voluntarily name them to receive a benefit. If you have a court order that mandates benefits are to be paid to them, you should not elect them on your retirement application. That is a separate election.

Only name your former spouse on your application if you are voluntarily giving them benefits. Otherwise, the court order will take precedence (court orders will always be prioritized). OPM will then review your application to confirm if additional benefits have been elected for the named individual.

What if my former spouse was awarded all of the Survivor Benefit plan in our divorce?

If your former spouse was awarded the entire survivor benefit through a court order, the order will completely eliminate the benefit your current spouse is entitled to or would have received otherwise.

If a portion of the survivor benefit was awarded in your divorce, your current spouse will be entitled to whatever remains after your former spouse receives their benefit. It’s essential to understand how a court order may affect these benefits. For more on this subject, I encourage you to see this webinar, 3 Ways a Court Order Wrecks Your Federal Pension.

What if I’m not married?

If you are unmarried and have no former spouse, you are not entitled to participate in the spousal survivor benefit election.

You may be eligible to choose another form of survivor benefit called the Insurable Interest Option. At first glance, this may sound like a reasonable solution for single individuals, but many discover that the expense far outweighs the benefit. To learn more about leaving a survivor benefit to someone besides a spouse, please watch this webinar, Leaving Your Federal Pension to Your Children (or Others).

Cost & Taxes

The maximum benefit that can be left is 50% of the FERS pension. The cost to you as a FERS retiree will be 10% of your FERS pension. As long as you are living in retirement, you will pay a 10% premium on your pension for the protection you provide your spouse or a former spouse.

Cost Example

John has a FERS pension of $30,000 a year. If he intends to provide the maximum benefit to his spouse, he would pay a $3,000 premium each year, and his wife would get $15,000 a year when he dies.

Consider, too, that this example only demonstrates the first year of retirement. Each time John receives a cost of living adjustment in retirement, his pension increases. Subsequently, the benefit he intends for his spouse also increases. And the cost of the premium continues to increase (10% of an ever-increasing pension amount).

Though this isn’t necessarily good or bad, the benefit and the costs are increasing in tandem with one another. As you consider your situation, this may be a factor in your decision-making process.

Just as you are taxable for your retirement income during your living years, any monies paid out of this program are also fully taxable and are your beneficiary’s responsibility.

Does the Survivor Benefit Plan Solve Your Problem?

The Survivor Benefit Plan only protects half the income you set aside for your spouse, which doesn’t satisfy many retirees’ needs. Recognizing that there are shortfalls to the government’s solution and that financial spousal support is a much higher priority among retirees (than their employer), our network of financial professionals can help you understand your options. My goal is to help you gain clarity, so you feel confident and in control of your retirement future and that of your spouse upon your death.