Should I buy Life Insurance and take more pension money

[FireCat]

Greetings all. I am new to the board and this is my first posts so go easy on me. I am set to retire in 18 months. I will receive a fireman's pension that will allow me the option of electing single life,66% ,50%, or 100% survivorship My question is would it make more sense to buy some term insurance and take the extra money vs. the 66% which I am leaning towards. The difference per month between single life and 66% is $482. My pension has a cola cap of 2% per year and there are no health benefits tied to it and it would be taxed of course. It seems that a life insurance policy would be smarter as I could save a couple of hundred dollars a month as well as if I die my wife's benefit would be tax free. I was thinking of getting 1.5 mil. for first 10 years, 1mil for years 10-20, and 500k years 20-30. Our age at retirement will be me 53 wife 55.

Firecat

 

[Bluetrekrider]

Take the full pension amount and buy term. At your age it will likely pay off in the long term.

 

[tryan]

I was shocked how cheap term policies are ... if you're healthy it's a no brainer.

 

[samclem]

G It seems that a life insurance policy would be smarter as I could save a couple of hundred dollars a month as well as if I die my wife's benefit would be tax free. I was thinking of getting 1.5 mil. for first 10 years, 1mil for years 10-20, and 500k years 20-30. Our age at retirement will be me 53 wife 55.

If your pension is to be a relatively fixed part of your monthly income stream throughout your retirement (that's my assumption), then why the decreasing amount of life insurance to replace that income stream in years 20-30 if you die before your wife?
Also, consider the inflation impact 30 years out. If we have 3% average inflation, that 500K check from the insurance company in 25 years will buy as much as $250K in today's dollars. At a 4% annual wtihdrawal rate for your DW, that's $833 per month: how does that compare with the total pension she'd get?
Then there's the question of what happens after 30 years--if you replace the pension with insurance, she'd get nothing, right? What income stream will cover her at that point?
Is there another type of insurance product that pays >only< if you pre-decease her? Yes, you are likely to go first, but in a considerable number of cases the woman dies first (and she is two years older than you are), in that case all your premiums will have been paid for something you don't need. It might be 20% or so cheaper to buy this type of product, if it is available at all--no sense in buying more insurance than you need.
The issue probably boils down to a look at all the income sources you two have and when will the various income streams come online (e.g. will she be getting a lot of SS? Does she have a pension of her own? How much savings have you got and what portion of your total living expenses will you be able to cover with reasonable withdrawals? etc). You'll probably want to noodle that stuff out on a spreadsheet, and FIRECalc can help.
The idea of replacing some of your pension with life insurance might have merit, but I'm not sure there's enough info in your post to know if you'd likely come out ahead.
When I retired from the USAF, we chose to buy the "survivor's benefit plan" (SBP) to assure DW continued to get part of my pension if I checked out first. Like you, we looked at other options and in our case going with the SBP seemed to be the best one for our particular case, but that program is different from what you've got available.

Sorry for all the questions, they are just intended to give you points to consider. Welcome to the board!

 

[FireCat]

If your pension is to be a relatively fixed part of your monthly income stream throughout your retirement (that's my assumption), then why the decreasing amount of life insurance to replace that income stream in years 20-30 if you die before your wife?
Also, consider the inflation impact 30 years out. If we have 3% average inflation, that 500K check from the insurance company in 25 years will buy as much as $250K in today's dollars. At a 4% annual wihdrawal rate for your DW, that's $833 per month: how does that compare with the total pension she'd get?
Then there's trhe question of what happens after 30 years--if you replace the pension with insurance, she'd get nothing, right?
The question probably boils down to all the income sources you two have and when will the various income streams come online (e.g. will she be getting a lot of SS? Does she have a pension of her own? How much savings have you got and what portion of your total living expenses will you be able to cover with reasonable withdrawals? etc). You'll probably want to noodle that stuff out on a spreadsheet, and FIRECalc can help.
The idea of replacing some of your pension with life insurance might have merit, but I'm not sure there's enough info in your post to know if you'd likely come out ahead.

Thanks for the thought provoking questions. My thoughts on decreasing the amounts over time is that in the event I die in years 1-10 a $1M payout would more than make up for my pension. In years 10-20 she would need less of a payout in insurance as she would need it for less time theoretically. I ran the firecalc for $1 mil for 35 years and came out at 100% success at a withdrawal rate that would mimic my reduced pension @66%.

Here are my #'s

For both of us need 100k per year before taxes in retirement to live comfortably
pension is going to be 78k with single life
We will have $720k in a 457/403b with 100k as a roth portion
If I die before my spouse I could leave her with
a) Pension in amount of $48k per year
b) no pension but an insurance policy that would be able to pay out
1. year 1-10 1 million
2. year 10-20 750k
3. year 20-30 500k

She will get a pension and SS at 65 that will be $30k

Thanks again for the suggestions and thoughts. I still have 18 months to FIRE, but want to make sure I have all my ducks lined up.

 

[heeyy_joe]

Max the pension.

 

[pb4uski]

Below is a link to a good article that directly addresses your issue. I liked the laddering idea where you buy 10, 20 and 30 year term policies to provide what is needed to keep DW whole if you die.

Creating a Life Insurance Ladder

 

[Independent]

Greetings all. I am new to the board and this is my first posts so go easy on me. I am set to retire in 18 months. I will receive a fireman's pension that will allow me the option of electing single life,66% ,50%, or 100% survivorship My question is would it make more sense to buy some term insurance and take the extra money vs. the 66% which I am leaning towards. The difference per month between single life and 66% is $482. My pension has a cola cap of 2% per year and there are no health benefits tied to it and it would be taxed of course. It seems that a life insurance policy would be smarter as I could save a couple of hundred dollars a month as well as if I die my wife's benefit would be tax free. I was thinking of getting 1.5 mil. for first 10 years, 1mil for years 10-20, and 500k years 20-30. Our age at retirement will be me 53 wife 55.

Firecat

If the life insurance company and your pension plan use the same mortality assumption, the before tax advantage should go to the joint life pension.

If you're in excellent health, the life insurance company may be using a much lower mortality assumption. Note that you can't be sure of the insurance premium until the life insurance company has actually looked at your health and accepted your application.

Do you have a plan for what your wife will do if you die after 83?

Your decreasing amounts make sense to me. Note that if get hit by the truck in the first year, you're assuming she can convert a $1 million lump sum into a lifetime income that starts at $48k and increase at 2% per year (reaching, for example, $96k if she lives to 91). You may want to leave her your ideas on how she should do that.

 

[FireCat]

If the life insurance company and your pension plan use the same mortality assumption, the before tax advantage should go to the joint life pension.

If you're in excellent health, the life insurance company may be using a much lower mortality assumption. Note that you can't be sure of the insurance premium until the life insurance company has actually looked at your health and accepted your application.

Do you have a plan for what your wife will do if you die after 83?

Your decreasing amounts make sense to me. Note that if get hit by the truck in the first year, you're assuming she can convert a $1 million lump sum into a lifetime income that starts at $48k and increase at 2% per year (reaching, for example, $96k if she lives to 91). You may want to leave her your ideas on how she should do that.

Thanks for the reply. I am pretty new to FireCalc, but when I run the scenario of a 1Mil. life insurance payout even on day one for 35 years with my wife's SS and pension starting in 8 years @ 30k combined and a withdrawal of 48k per year I get 100% success. As we age in years 10-20 @ 750k payout I get 100% choosing a 25 year life expectancy for her. Finally in years 20-30 with a 500k payout I also get 100% with an additional 15 years of life expectancy. I know I may be missing something, but am not sure. I am still looking for insight so feel free to give me more input. Thanks again to all.

 

[jimnjana]

What does your wife say? Do you qualify for SS? Is her spousal SS benefit bigger than her own SS benefit if you defer to age 70 in taking yours? Can you move more of your retirement assets to the Roth? DW and I both did not take the survivor benefit option on our pensions but our situation is different.

 

[FireCat]

No SS for me just the pension. She qualifies for SS of 15k and pension 15k at 65. 9 years from our intended retirement date. Would be interested in how your situation warranted not taking survivor option. Not sure about your Roth question. We will have 620k from 457 plan tax deferred and 100k in a Roth 403b plan.

 

[jimnjana]

Firecat, DW and I both have cola'd pensions. Both of us qualify for SS. DW is 10 years older. We didn't take spousal benefits and opted for term insurance (I have a legacy whole paid up whole life policy too). Our term insurance is enough to pay off mortgage.

 

[Wu_wu]

FireCat, just a word of caution. If you're planning to get insurance around when you're 60-80 please be sure that there are companies that will be able to insure you and if you are healthy enough to be insurable. A lot of companies do not sell insurance to individuals above a certain age range which varies from company to company and some may be stricter on ratings.

 

[Theseus]

Timely discussion, I just spent the last few days crunching numbers to better understand the implications of a similar scenario. DW and I both have defined benefit non-COLA pensions. Not huge by any means, as mine was frozen a few years back and she doesn't have a great deal of time of service credited, but nonetheless combined these make up about 25% of our projected retirement income. Between that and SS (both have roughly the same projected SS benefits, so spousal survivor benefits won't be much help) we run the risk of being caught short of funds (note to DW - sell the house) if one dies early.

So, analytical (emphasis on the anal part) me performed multiple annual FIRE projections to see just what it meant in terms of failure rates. In our case, I noted the trend was definitely skewed towards higher potential failure at ages 58-72 due to underfunding the survivors' retirement, although, when calculating the shortfall, even the worst case of one of us passing in the first year of retirement - the required spending adjustment by the survivor is fairly minor - i.e. if I survive, adjusting to individual spending to 82.4% of our planned spending if we opt for annuitant only, and 89.1% if we both opt for 100% survivorship. If she survives, the numbers are 79.7% and 89.2%. Essentially 2x HI premiums per person is what it amounts to, and that is in the worst case first year, when the probability of that happening based on actuarial tables is still quite low, in the neighborhood of 10%.

Failure rates taper off quite quickly from age 58 to 70, where statistically there is still a better than 70% of being around. In the area of roughly age 70-90 failure rates are easily 5% or less with 100% survivor, and with annuitant only there are many years of zero projected failure. Beyond that things start getting a bit scruffy, but then the possibility of having to decide whether to fund a public library or community swimming pool is just as likely - after all FIRE "failure" is worst case. As others have said, when I'm 85 ask me how I feel about that.

Before doing this analysis I had planned on taking 100% survivor for each of our DB plans, now I see annuitant only being the way to go. We each have existing insurance policies that we will maintain until 70ish to guard against the--what I now see as--minimal risk.

 

[TuborgP]

Been there done that regarding this question. Prior to retiring did the analytical thing talked to others in similar situation. Took the 100 percent survivor for each of our pensions. Why? Our two pensions reduced along with my spousal especially by 66 was more than enough fir either if us.

 

[friar1610]

The idea of replacing some of your pension with life insurance might have merit, but I'm not sure there's enough info in your post to know if you'd likely come out ahead.
When I retired from the USAF, we chose to buy the "survivor's benefit plan" (SBP) to assure DW continued to get part of my pension if I checked out first. Like you, we looked at other options and in our case going with the SBP seemed to be the best one for our particular case, but that program is different from what you've got available.

I'm retired Navy and when I retired I opted to take a lesser amount of SBP than I could have. In retrospect, I wish I had taken the full amount because of the inflation adjustment that she would get annually. She will still be OK, though due to other income streams.

One thing that I found very interesting during the pre-retirement seminars that we were required to attend... Navy Mutual Aid Association, a non-profit organization that sells insurance policies and annuities to Navy members did a presentation in which they strongly recommended taking SBP at the max amount instead of buying a big insurance policy. And they are in the insurance business! I thought that was telling. Not sure that's the same recommendation one would get from a commercial insurance company.

 

[FireCat]

I'm retired Navy and when I retired I opted to take a lesser amount of SBP than I could have. In retrospect, I wish I had taken the full amount because of the inflation adjustment that she would get annually. She will still be OK, though due to other income streams.

One thing that I found very interesting during the pre-retirement seminars that we were required to attend... Navy Mutual Aid Association, a non-profit organization that sells insurance policies and annuities to Navy members did a presentation in which they strongly recommended taking SBP at the max amount instead of buying a big insurance policy. And they are in the insurance business! I thought that was telling. Not sure that's the same recommendation one would get from a commercial insurance company.

Thanks for the info on your situation. My experiences have been that all the insurance agents I have been in contact with 100% say that it is much better to buy insurance. I still don't believe its cut and dry. On one hand it seems logical to assume if I save money each month due to the cost difference of buying insurance vs. what I would get from pension it would make sense to take the route of saving money each month. The difficult thing for me to grasp is how much insurance I should purchase to replace the value of my pension survivor benefits. The COLA for my pension is capped at 2% per year which is still pretty good. My plan was to purchase a reasonable amount of insurance to replace that value. I don't want to overpay coverage, but I don't want my wife to not have at least the same value if I die first.

If I go the survivorship route I would choose 66% benefit which would be $480/month less than my single life policy. By laddering policies I have a quote of the following $500k for 30, $500k for 20, and $500k for 10 years
Monthly Savings
Years 1-10 $326 for 1.5 million dollar coverage $154 plus pension cola
years 11-20 $272 for 1 million dollar coverage $208 plus pension cola
years 21-30 $175 for $500,000 dollar coverage $405 plus pension cola

One problem I see is that there is no cola on the insurance policies so in year 29 when I would be 83 $500k is not that worth what it is now.

Another obvious one is if I live longer than 83 and wife lives longer than 85. Possibilities yes, but we do have other income streams that hopefully will not lose value. Her 1500/month SS and her pension at 1500/month both cola adjusted as well as our IRA dollars.


Thanks again for all the ideas.

 

[samclem]

One problem I see is that there is no cola on the insurance policies so in year 29 when I would be 83 $500k is not that worth what it is now.

Yes, $1 subjected to just 2% inflation for 29 years will buy 44% less than it would in year 1. And buying a higher $$ amount of coverage in these later years (when you are older and more likely to die) might be pricey.

 

[unno2002]

[FONT=&quot]We opted for more pension now, term life insurance, and rental properties. We assume I'll go "aaaggghhhh, thud" before the wife. If the money in the life insurance is still worth anything in the market, she has it to live on. If the dollar continues to get eaten by inflation (thank you politicians & bankers…) then the insurance can pay off the rentals, she has no more mortgages on them and gets to pocket all of the rents, which we hope can keep up with inflation…[/FONT]

 

[pb4uski]

Yes, $1 subjected to just 2% inflation for 29 years will buy 44% less than it would in year 1. And buying a higher $$ amount of coverage in these later years (when you are older and more likely to die) might be pricey.

But it is pretty easy to calculate the higher amounts using a real discount rate rather than a nominal discount rate and price a higher ladder of coverage in making a decision.

 

[samclem]

But it is pretty easy to calculate the higher amounts using a real discount rate rather than a nominal discount rate and price a higher ladder of coverage in making a decision.

Agreed. But, buying even more life insurance for an old codger is gonna be expensive.

If all else is equal (and it may very well not be), the survivor benefit offered with the pension should be the better buy, even if the OP figures out the right amount of insurance to approximate the future value of his survivor benefit option. Why? If he chooses the survivor benefit option:
1) The OP isn't paying for coverage he doesn't need (e.g the case where his wife predeceases him--she is a couple of years older. Besides gender, there are obviously other health factors, etc. But the fact that she might go first should make the "survivor benefit" premiums lower than his life insurance premiums for the same coverage amount.)
2) The OP gets more of the coverage he does need (a continuation of these pension payments for use by his wife if he dies first and he is older than 83).

Put another way: The "insurance option" is only better than the "survivor benefit option" if the "above-the-expected-payout" charges (aka profit for the issuing company) included in the premiums for the latter are a lot higher than for the former. If these costs are close to the same, the survivor benefit option should be a slam dunk.

 

[pb4uski]

A lot of assumptions/speculation there that may or may not be true. I would run the numbers and do the analysis and then decide. That said, if it was a close call I would lean to the survivor benefit.

 

[Greg V]

Another item to consider is that the insurance option assumes your spouse is ready, willing and able to appropriately invest, or work with an outside agent/agency to appropriately invest, the insurance proceeds to set up and maintain the intended income stream.

For folks who don't enjoy, or at least feel comfortable with, managing their investments, having a dependable monthly stipend from a survivor benefit, especially if it is COLA'd, may be as significant an issue as the numbers...assuming both options provide sufficient income.