Pension Death Benefit

[nun]

So the big day has arrived when I apply for my pension. I have two income options:

1) Life time pension of $19813 / year with a 2% COLA starting at 55 with no death benefit.

2) Life time pension of $19615 / year with a 2% COLA starting at 55 with a lump sum payment to a named beneficiary of the balance of my pension account at the time I die........So if I died the day after I started the pension my beneficiary would get around 280k and after about 15 years they'd get nothing when I die.


I think this is a no brainer, what do you think?

 

[aja8888]

Yep, no brainer.

 

[Fedup]

I wonder who would choose 1?

 

[pb4uski]

I wonder who would choose 1?

A no-brainer?

 

[Big_Hitter]

A no-brainer?

 

[dixonge]

I think this is a no brainer, what do you think?

We've made all of our projections based on each spouse receiving the other's full monthly benefit payment. No pop-ups, no reduced benefits, no lump-sum anything. Death benefits are definitely no-brainers...

 

[nun]

Maybe I should add that I'm single and have no children.......still a no brainer IMHO as my niece would be well set.

 

[GrayHare]

I agree this seems a no-brainer, but are we overlooking something? This is a kind of life insurance, and insurance is usually actuarially neutral, which means the options should not appear lopsided.

 

[Fedup]

I agree this seems a no-brainer, but are we overlooking something? This is a kind of life insurance, and insurance is usually actuarially neutral, which means the options should not appear lopsided.

That's what I mean, the two options are virtually identical, why would anybody choose 1, except they don't have anybody to leave it to. Yeap, that makes sense.

 

[nun]

I agree this seems a no-brainer, but are we overlooking something? This is a kind of life insurance, and insurance is usually actuarially neutral, which means the options should not appear lopsided.

Well starting at age 55 the pension reduction is 1%, but the death benefit will be zero in around 15 years. The vast majority of 55 years olds will still be alive by age 70 so the benefit won't often be claimed so that's why it isn't that expensive.

 

[youbet]

Well starting at age 55 the pension reduction is 1%, but the death benefit will be zero in around 15 years. The vast majority of 55 years olds will still be alive by age 70 so the benefit won't often be claimed so that's why it isn't that expensive.

Unless your niece would need the money, why buy life insurance for her?

Restated, the deal is that you pay a $198 annual premium for a diminishing term, non-renewable life insurance policy. It pays $280,000 at age 55 and diminishes to zero at age 70. You continue to pay the $198 premium for life.

Since you don't carry term life insurance on yourself with your niece as beneficiary now, I guess that for you to buy it via your pension you'd have to think it was a huge bargain or have some other motivation. I haven't priced life insurance in a long time, so I don't know.

I'm not sure what I'd do. I know that after I turned 70 and the insurance was zero, it would annoy me to pay the $198/yr for the rest of my life.

 

[donheff]

Unless your niece would need the money, why buy life insurance for her?

Restated, the deal is that you pay a $198 annual premium for a diminishing term, non-renewable life insurance policy. It pays $280,000 at age 55 and diminishes to zero at age 70. You continue to pay the $198 premium for life.

Since you don't carry term life insurance on yourself with your niece as beneficiary now, I guess that for you to buy it via your pension you'd have to think it was a huge bargain or have some other motivation. I haven't priced life insurance in a long time, so I don't know.

I'm not sure what I'd do. I know that after I turned 70 and the insurance was zero, it would annoy me to pay the $198/yr for the rest of my life.

+1 I don't pay any attention to term life rates so I don't know the answer so this is not a no brainer to me. Does the $280K stay $280K for 15 years or does it decline? What would equivalent term life cost for 15 years and how does that compare to the cost for an average life expectancy for the pension reduction?

 

[rayinpenn]

So if I read this right they are offering $280K insurance for $200 for the first year? And the $280K would decline each year. I must be a really simple because it sounds like good value.


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[Genug]

I have seen a provision like this before but the value was defined as just the employee contributions, not the combined employer and employee. Not sure of your plan's details but please make sure the entire 280k is available to your beneficiary before you decide.

In the example I saw the value was gone in about three years. Congrats on your retirement.





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[pb4uski]

Maybe it isn't such a no brainer after all. A 54 year old male can buy a $275k 30-year level term policy for less than the $198/month difference according to term4sale.com ... plus the term life premiums are fixed but the pension benefit difference would presumably increase with the COLA.

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[donheff]

Maybe it isn't such a no brainer after all. A 54 year old male can buy a $275k 30-year level term policy for less than the $198/month difference according to term4sale.com ... plus the term life premiums are fixed but the pension benefit difference would presumably increase with the COLA.

Except the difference OP stated was $198 per year which makes it a whole different proposition.

 

[youbet]

Except the difference OP stated was $198 per year which makes it a whole different proposition.

Good catch donheff.

I looked around a bit and can't find any term life insurance premium info for a situation like this. $198 annual premium (paid for life, even after the benefit is zero). $280k initial insurance diminishing to zero over 15 years. Non-renewable. Initial age = 54.

It amounts to an insurance policy with a nice $280k death benefit the first year. But, to a young man of 54 not likely to die. The benefit declines rapidly to zero by age 70. The premium remains constant at $198/yr for life, which hopefully would extent long after age 70!

I dunno..... In nun's situation, and not knowing the financial status of his niece, I might take a pass on this and go with the full pension. $198 annually isn't very much. But, the chances of a payout ever being a meaningful benefit to the niece seems fairly remote and it would annoy me to continue to pay the $198 for life despite the benefit no longer existing.

It's a relatively small amount of money either way, so not a big deal I guess.......

 

[pb4uski]

+1 didn't notice it was per year... my bad...makes sense.

 

[Texas Proud]

I think it is a no brainer... but for option 1....

When I first read it I wondered how much a term policy would cost.... to me that is the info that is not given...

But some people have put that info down...

So, the option is to pay about $200 per month for LIFE for a 15 year policy that actually declines in value... so in 14 years the value of the 'policy' might only be a few thousand....

The other option is to take the full amount, buy a term policy and after 15 years (without the value of that policy going down) to determine if you want to buy another or just let it go...


Remember, that $200 will be getting increases over the year, so in reality it is going up each year...


I would have taken option 1 for sure....

 

[Fedup]

It's not $200 per month, it's for year. But it's good to pick option 2 for accidental insurance.

 

[Texas Proud]

It's not $200 per month, it's for year. But it's good to pick option 2 for accidental insurance.

OK, never mind...