Term Life on Pension rather than Benefit options?

[Maneiac]

My DW will retire next year with a small Teachers Pension from the State. We have been considering setting it up so she receives her FULL Benefit and then purchasing her a Term Life Insurance of some amount (How is that figure calculated?) to replace the survivor benefit portion of her Pension. Is this something that is done a lot? I'm sure we are not inventing the wheel here!
Thanks for any input pro or con.
Larry

 

[saluki9]

In theory it is a great arbitrage.

the problem with that plan is that term insurance is very expensive for older folks. The only reason insurance companies offer term is that they know the vast majority (around 99%) of term policies will expire rather than pay a death benefit. Sadly, that is not the case with older humans.

I'm not saying not to do it, just run some calculations first. You will have to estimate your life expectancy and discount the future payments to calculate the face value of the insurance policy.

 

[Nords]

Is this something that is done a lot? I'm sure we are not inventing the wheel here!

Other questions to consider: Are you guys both getting pensions? Do you need to replace her income if you're a widower? If you haven't already looked at it, keep in mind that Social Security includes its own survivor benefits.

Spouse and I are each getting our own pensions so we cancelled our survivor benefits and we each take the full pension amount. Neither one of us carries life insurance since there's no income that we'd need to replace.

Even term life gets pretty expensive as you age. I think the vast majority of ERs use life insurance, if they use it at all, as an estate-planning tool.

 

[brewer12345]

In theory it is a great arbitrage.

the problem with that plan is that term insurance is very expensive for older folks. The only reason insurance companies offer term is that they know the vast majority (around 99%) of term policies will expire rather than pay a death benefit. Sadly, that is not the case with older humans.

I'm not saying not to do it, just run some calculations first. You will have to estimate your life expectancy and discount the future payments to calculate the face value of the insurance policy.

I'll go you one better. I wouldn't skip the survivor option unless you can use the higher payout to more than fund a whole life or no-lapse UL policy, not term.

 

[Maneiac]

Other questions to consider: Are you guys both getting pensions? Do you need to replace her income if you're a widower?

Thanks NORDS and others for the "reality" check....I rolled over my 401k and 33yr cash buyout into an IRA now approaching 7 figures so I would say no to the question of needing her income replacement since we are LBYM now in the mid 15% bracket...and of course she should be ok with her own COLA'd Pension and being the beneficiary of my half of the retirement equasion.
Since her Pension is a State Funded teachers Pension she is not really subject to her own (or much of mine!) Social Security income.
Me thinks I have been reading too many "Retirement/Investment" Books!

 

[mickeyd]

I wouldn't skip the survivor option unless you can use the higher payout to more than fund a whole life or no-lapse UL policy, not term

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Most life insurance salesmen have been using this ploy to sell cash value LI for many years.

 

[brewer12345]

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Most life insurance salesmen have been using this ploy to sell cash value LI for many years.

Uhuh, but the alternative is to just take the survivor's option, which isn't so bad.

 

[astroboy]

We looked at this very idea ourselves a few years ago and decided the small financial gain each year (higher pension minus term premiums) just wasn't worth the greater security I had knowing DW would be guaranteed the pension after me versus outliving the 30 yr. term we looked at.

 

[Alan]

I have already chosen to take Variable Life Insurance (not term) 5 years ago while we were both very healthy to get the higher company pension with a 75/25 split instead of 50/50. So far so good, after 5 years I have paid in $25, the cash value is $17K and that cash value is bang on the prediction so far. (avg net cost of $1,600/year)

The policy is for $500K. I don't know that I would necessarily advise anyone to go the same route, but it seemed like a good idea at the time and a couple of financial planners have looked at it since and given their blessing.

 

[Maneiac]

Thanks all for the input........

We have decided to pass on the survivor options for DW's Pension and make any insurance "contributions" on the LTC side of things.

Larry

 

[brewer12345]

Thanks all for the input........

We have decided to pass on the survivor options for DW's Pension and make any insurance "contributions" on the LTC side of things.

Larry

Heh, you turn your nose up at ife insurance, yet you are interested in LTC? Wanna buy a bridge?

 

[New Thinking]

One additional thought on this strategy..Using life insurance may work for some because it comes with significant tax advantages..Life insurance is recieved tax free if structured properly..Let me give an example..We have discussed on this forum the "Tax Torpedo" where pension/IRA income gets taxed and thereby causes the taxation of SS. This marginal tax rate will be over 50% for some in the future under current law and could be higher for some retirees when state taxes are applied. Since the thresholds for SS taxation are not indexed for inflation and are lower for single (read widows/widowers) individuals many more individuals will pay very high marginal tax rates on their survivor pension/IRA income. Since life insurance is tax free it could generate very low taxable income down the road and thus keep SS from being taxed.

 

[kcowan]

We went through this scenario and selected the survivorship option. It was extremely cheap because, unlike life insurance, we were only insuring the odds of one of us outliving the other.

At the time, DW was 2 years younger and had a lfie expectancy of 2 years more, so the insurance was to cover 4 years of added payments from their acturarial tables.

Remember that when you do Brewers calculation. The face value of any insurance option would just cover the difference in life expectancies. The benefit of joint survivorship is that they carry the risk of DW living substantially longer.

 

[Moemg]

Will your healthcare benefits be attached to her pension ? If so I think the survivor option is a safer route to go unless you are near medicare age .

 

[Maneiac]

Heh, you turn your nose up at ife insurance, yet you are interested in LTC? Wanna buy a bridge?

Hope this comes out...not sure how to add quote at top and seperate text.

Brewer...We can "self insure" for the survivor portion of the wife's Pension. I'm not so sure, at this time, that we can self insure for any long term care incident and come out with anything left for the Heirs. So tell me...where is that Bridge again? I want to make sure I don't burn it while crossing!