Survivor Annuity Plan vs. Life Insurance Showdown

“Hi Cooper, I’m getting ready to retire, and I can’t decide if I should choose the Survivor Annuity Plan or purchase life insurance. What’s your opinion?”

I receive this question nearly every time I sit down with someone preparing to retire. I also receive it from readers who have been sold the idea that life insurance is the cure-all for everything, including the Survivor Annuity (who would have thought a life insurance agent would try to sell you life insurance?)

But, I’m here to tell you life insurance is not ALWAYS better than the Survivor Annuity Plan.

Viewing this from the opposite way, the Survivor Annuity Plan is not always better than life insurance.

As with just about everything in financial planning, as well as life in general, the decision to choose the Survivor Annuity Plan or Life Insurance is based on a myriad of factors; most of those being unique to you.

Although I won’t be able to tell you definitively which you should choose, I will be able to provide some general guidance and am always available to discuss on an individual basis through my contact form.

Without further adieu, let’s dig in!

What is the Survivor Annuity Plan?

Many of you reading this likely have no idea what the Survivor Annuity Plan is.

You probably should, but most don’t find out about it until they’ve received their exit paperwork. This is also the time that you’ll have a million and one things rushing through your brain, and will have to make a decision that is permanent and affects your entire family for likely decades to come.

I hope this scares you, not so you’re frightened from making a decision, but so that it spurs you to educate yourself and prepare for the decision. The Survivor Annuity Plan is CRITICAL and must be approached with care.

The Survivor Annuity Plan allows you to leave your surviving spouse a portion of your pension if you are to pass away before they do.

That sounds simple enough, but there is, just as with everything else in your retirement system, much more complicated details.

As a FERS employee, you have three options when it comes to the SAP:

  1. Leave 50% of your annuity pension (costing you 10%)
  2. Leave 25% of your annuity pension (costing you 5%)
  3. Elect no Survivor Annuity Plan (with spouses consent)

So, if you decide that you’d like to leave half of your pensions to your spouse, it’s going to cost 10% of each pension check you receive each month. If you only want to leave a quarter of your pension, it will cost you 5%.

Many of you are thinking, “Hmm, that’s not so bad.”

And it’s not… until you realize that your surviving spouse is the only person that can receive the benefit.

The Biggest Disadvantage of the Survivor Annuity Plan

The most significant disadvantage to the SAP is not that it’s going to cost you, it’s that it can pass to one person, and one person only.

This is great if you just so happen to be a mind reader and know that your spouse is going to die many years after you. However, for the mortal lot of us who have no idea how much sand is left in our hourglass, this is a HUGE problem.

Think about it, what if you pay into the the Survivor Annuity Plan because you want to care for your spouse after you pass away (as you should,) and then suddenly after 20 years, one morning your spouse doesn’t wake up? Sure, the money you spent on the SAP will likely be the last thing on your mind, but you’ll eventually get to thinking about all the money you spent.

Here’s an illustration of the above example:

As you can see, if you had a yearly pension payout of $50,000 a year and chose the 50% SAP, you’d pay $100,000 over a 20 year period. If it just so happened that your spouse passed away before you, all that money you spent would go to nothing. Yes, nothing and no one.

Make sure you understand this, the Survivor Annuity Plan can ONLY pass to a surviving spouse. AND, once this decision is made (on your exit paperwork) it can’t be reversed.

Due to this, many people have decided to look at a life insurance policy for replacement of the SAP.

Survivor Annuity Plan vs. Life Insurance

Before I go any further, please understand that life insurance is NOT always better.

In fact, for many people not only is it not a better option, but it isn’t an option at all! Think about it: if you’ve had cancer, a heart attack, are in bad health, or any number of other health issues, you don’t have to be a genius to understand that your premiums for life insurance would likely be pretty high. Or, even worse, you may not even qualify for life insurance.

So, if you fall into this category, your best bet is most likely electing a Survivor Annuity. But, if you can qualify for life insurance, it’s likely in your best interest to at least find out how much it would cost.

This is exactly why I tell you to plan ahead. Not only will it take a while to see exactly what your cost would be for life insurance, but the younger you are, the cheaper life insurance will be.

If you can prevent it, which if you’re reading this and you’re at least a year out from retirement, you can; do not be like the people walking into my office ready to turn their exit paperwork in without any idea how much life insurance replacement would cost.

Benefits of Life Insurance

Although life insurance isn’t always superior to the SAP, it does have some pretty distinct advantages.

Advantages like:

  • Beneficiaries can be updated as often as desired.
  • Can pass to multiple beneficiaries.
  • Tax-free to beneficiaries.
  • Some have living benefits.
  • Can be comparably priced to the SAP.
  • Often has more flexibility

That’s a lot of benefits! The most notable one in comparison to the SAP is the fact that it can pass to someone other than your surviving spouse should you desire.

At this point, you’re likely thinking, “life insurance seems like the no-brainer choice!”

Unfortunately, that’s not necessarily the case.

The first reason is that from a cost-benefit analysis, the survivor annuity is often a better choice due to annual adjustments to keep pace with inflation.

The second reason is one that life insurance may not tell you.

The #1 Reason the Survivor Annuity is Better than Life Insurance

Repeat this after me: “Health Insurance.”

If your spouse plans to be on your health insurance in retirement, YOU MUST CHOOSE A SURVIVOR ANNUITY PLAN.

If you do not a choose a SAP, your spouse cannot use your health insurance in retirement. Also, this decision to choose or not choose a SAP is irreversible. So, even if your spouse has an inkling of desire to be on your health insurance in retirement, I would likely suggest choosing a SAP.

This said, you can choose either the 25% or 50% option, and your spouse will be able to remain on your health insurance.

So, what some federal employees do is: Choose the 25% SAP, and replace the other 25% with life insurance.

So, Which Should You Choose?

Unfortunately, I can’t say for sure.

I can say that an honest and competent financial planner should be able to provide you with which option is best, albeit for a fee. This is also something I do, and you can find out more about my work here.

I believe I have provided you with enough information to make a decision, although I certainly wouldn’t shy you away from a second opinion.

– Cooper Mitchell

Author Cooper Mitchell

Hello, I'm Cooper. I am the President of and an Investment Advisor Representative for Dane Financial, LLC. I specialize in helping Federal Employees better understand their benefits and prepare for retirement through Comprehensive Financial Planning and Investment Management. When I'm not helping federal employees, you can find me focusing on other entrepreneurial pursuits, spending time with my beautiful Wife, worshipping Christ, blogging, lifting (somewhat) heavy weights, and reading non-fiction.

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  • MK Kelly

    Cooper-

    Agree this is a good topic for careful advance planning. However, the point you assert “$100,000 benefit that no one will use” is arguable. The earlier point that only your spouse can benefit is a key planning factor. However, what about if your spouse dies but then you later marry again? Can the new spouse be named as beneficiary? Even if the federal retiree does not remarry, the $100,000 is retained by the system and is used to pay other worthy surviving beneficiaries, is it not? Thanks for what you do and keep up the good work.

  • Harley

    This is a good article/discussion, but you are incorrect about a federal employee’s spouse not being covered by FEHB in retirement. They will still be covered so long as the retired employee is living, but coverage will be lost in the event of their death if no survivor benefit was elected for their annuity pension.