Difficult Pension Benefit Decision

At retirement, if you have a pension, you have to make a difficult decision that could negatively impact your future financial security and that of your spouse.  Most people with company pension plans give this decision little thought and simply select the first payout option listed on their pension estimate; Joint and Equal Survivor Option.

For example, assume your maximum lifetime pension benefit is $2,000 monthly.

With the joint and equal survivor option, you’ll receive a significantly lower lifetime pension payment. Your surviving spouse, however, will continue to receive 100% of your pension benefit if you die first.

• For as long as you live, you receive 75% of $2,000 the maximum life income option benefit.  Your benefit is reduced to $1,500 per month, for life.
• If you die first, your spouse will receive a lifetime monthly pension benefit equal to 100% of your benefit, or $1,500 per month.
• If your spouse dies first you will continue to receive $1500 per month.  There is generally no going back to the maximum $2,000 benefit. 

Second choice is  – Joint and One-Half Survivor Option:

If you elect the joint and one-half survivor option, you’ll receive a lower lifetime pension payment. On the other hand, if you die first, your surviving spouse will continue to receive a lifetime pension benefit equal to 50% of your pension benefit prior to your death. For example:

• For as long as you live, you receive a monthly pension benefit of $1,700 or about 85% of the maximum life income option benefit.
• If you die first, your spouse will receive a lifetime monthly pension benefit equal to 50% of your benefit, or $850 per month.
• If your spouse dies first, however, your monthly pension benefit remains at $1,700.

Next choice is – Life Income Option:

If you receive your pension benefit under the life income option, you receive the maximum lifetime pension payment. If you die first however, your surviving spouse receives nothing after your death. For example

• For as long as you live, you receive a monthly pension benefit of $2,000.
• If you die first, however, your spouse will receive a monthly pension benefit of $0.
• If your spouse dies first, your monthly pension benefit remains unchanged at $2,000.

At retirement, you will have to decide how your pension benefit will be paid out for the rest of your life:

• If you elect to receive the maximum retirement check each month for as long as you live, with the condition that upon your death, your spouse gets nothing.
• If you elect to receive a reduced retirement check each month, with the condition that upon your death, your spouse will continue to receive an income.
• This pension decision is permanent.
• The decision you make will determine the amount of pension income you receive for the rest of your life.
• The decision is generally irreversible.
• In making this decision, many people unknowingly purchase the largest death benefit (life insurance) they will ever buy and one over which they have no control.

How Can Retirement Income Protection Help Solve the Pension Benefit Dilemma?

Federal law allows a pension plan participant to waive the “joint and survivor” annuity payout requirement, with the written consent of his or her spouse.  This means that, with your spouse’s consent, you can elect to receive the MAXIMUM life income annuity payout at your retirement.

• However, what happens to your surviving spouse’s income and lifestyle if you should die first?

The solution, you maintain sufficient life insurance to replace the pension income lost at your death, assuring that your spouse will have an adequate source of income after your death.  This is a death benefit you control and if your spouse predeceases you the life insurance can be surrendered paying you back part or all of your premiums;  Depending on when death occurred.

In making this important decision, you should evaluate the risks associated with retirement income protection funded with life insurance:

• Your income after retirement must be sufficient to ensure that the life insurance policy premiums can be paid and coverage stay in force for your lifetime. Otherwise, your spouse may be without sufficient income after your death.
• If your pension plan provides cost-of-living adjustments, will upward adjustments in the amount of life insurance be needed to replace lost cost-of-living adjustments after your death?
• Does your company pension plan continue health insurance benefits to a surviving spouse and, if so, will it do so if you elect the life income option?