Pension with Survivor Benefit or Buy Life Insurance?

[Ncc1701]

Hi All,

In about 3 years, I and the Mrs. will be faced with the decision of either taking a higher single life pension amount or a lower joint and survivor pension benefit from her employer. At that time she'll be 57, I'll be 52 and we both plan to fully FIRE at that point.

The question is do we take the higher monthly payout and buy a $1.5M Universal life policy (she is in good health) or take the joint and survivor pension (I'm not sure how much the reduction will be yet). I figure $1.5M withdrawn at 4% per year would replace her pension if she were to pre-decease me.

Thanks for your thoughts!

 

[HawkeyeNFO]

It's a math problem, that you'll have to balance against your life expectancies. Need some more numbers to plug into the math problem, and you'll have to figure out the life expectancy based on your current health and the history of ancestors/brothers/sisters.

I had a similar issue when I retired from the military, and decided it was far cheaper to get term life insurance instead of the SBP (survivor benefit program). SBP would have guaranteed 55% of my pension after I died would go to my wife, but at an immediate cost of hundreds each month out of the pension for many years. Between having a pretty good nest egg already, and cheap life insurance, it was kind of a no brainer for us. But you gotta do your own math.

 

[ivinsfan]

Universal life can be pretty pricey.If you are talking term insurance be aware the price will rise pretty rapidly after the initial term expires and if health issues develop you can't shop around for something cheaper. But you could lower the amount of insurance as you age.



Have you actually priced out the insurance you are looking at?

 

[Ncc1701]

Universal life can be pretty pricey.If you are talking term insurance be aware the price will rise pretty rapidly after the initial term expires and if health issues develop you can't shop around for something cheaper. But you could lower the amount of insurance as you age.



Have you actually priced out the insurance you are looking at?

Thank you for your reply, I haven't priced out the insurance yet but would only do this if the cost is less than the reduction in pension payments.

 

[ivinsfan]

Thank you for your reply, I haven't priced out the insurance yet but would only do this if the cost is less than the reduction in pension payments.

How are you going to know if you don't price it?



Also do you have heirs you want to leave money that you only want to use 4% of the insurance proceeds per year? I take it you would invest this money?


I'd look at this right now while your spouse is healthy. Perhaps lock in a 30 term insurance... a lot can happen in 3 years.

 

[Ncc1701]

How are you going to know if you don't price it?



Also do you have heirs you want to leave money that you only want to use 4% of the insurance proceeds per year? I take it you would invest this money?

Correct, I would take the lump sum invest it in a balanced portfolio, withdraw 4% annually and leave whatever remains at my death to my heir.

I'm dreading talking to an insurance salesperson hence why I haven't priced it yet...

 

[ivinsfan]

Correct, I would take the lump sum invest it in a balanced portfolio, withdraw 4% annually and leave whatever remains at my death to my heir.

I'm dreading talking to an insurance salesperson hence why I haven't priced it yet...

The issue here is you are mixing and matching ie..money to live on and money to leave behind. I suggest you approach them as two different issues....

 

[Arkgolfer]

I will be retiring in May of 2022 and I'll have the same decision to make. The men on my side of the family tend to live to the mid 80's. My wife's side don't have that a great track record for longevity. I am 5 years older than my wife. I'm going with a term policy, then I'll make decisions after several years to see how investments have turned out to make adjustments to insurance.

My father made the same decision by going with insurance to protect loved ones. He came out way ahead doing it that way instead of opting for the full survivor benefit. I'm healthy now, so I'm going to follow the blue print I know can work. After his investments reached a certain point he dropped the policy.

DW will be drawing a pension as well in a few years and she will choose the no survivor benefit as well. We have both talked about it and have agreed to do it this way.

 

[Ncc1701]

I will be retiring in May of 2022 and I'll have the same decision to make. The men on my side of the family tend to live to the mid 80's. My wife's side don't have that a great track record for longevity. I am 5 years older than my wife. I'm going with a term policy, then I'll make decisions after several years to see how investments have turned out to make adjustments to insurance.

My father made the same decision by going with insurance to protect loved ones. He came out way ahead doing it that way instead of opting for the full survivor benefit. I'm healthy now, so I'm going to follow the blue print I know can work. After his investments reached a certain point he dropped the policy.

DW will be drawing a pension as well in a few years and she will choose the no survivor benefit as well. We have both talked about it and have agreed to do it this way.

Thank you for sharing! This helps me a lot!

 

[Ncc1701]

The issue here is you are mixing and matching ie..money to live on and money to leave behind. I suggest you approach them as two different issues....

Well Ivinsfan, I am simply thinking of how to best maximize the pension benefit. Not really whether it is a legacy or for living expenses.

I will probably not need my wife's pension if she pre deceases me but at the same time I don't want to leave money on the table in case she does.

 

[OldShooter]

IF you want to buy insurance, I think guaranteed renewable term insurance will be the cheapest. This is pure life insurance; any "cash value" policy will wrap pure life insurance in various costs, commissions, and fees. So it is guaranteed to be more. Buying term insurance annually also gives you flexibility should you decide that you don’t need it any more or want to change the amount.

Re rising premiums, yes, but again that is the cheapest because each premium is based on statistics for that year. If level premium is available you are simply loaning money to the insurance company to be paid back to you in the future via subsidized premiums. Probably your loan to the insurance company will be at zero interest or even negative interest. And, again, this tends to lock you in rather than giving you flexibility to change strategy every year.

All that said, it doesn't answer the question of whether the insurance option is a good one. That depends on your goals, risk tolerance, overall assets, DW's income sans insurance and her expenses. And, of course, how long she will live.

Re talking to an insurance salesman, there are many internet sites where you can price straight term insurance. Probably there are sites where you can price other options too.

 

[Ncc1701]

Thanks OldShooter...I didnt realize a term policy could go longer than 20 years, I will look into guaranteed renewable.

 

[OldShooter]

Thanks OldShooter...I didnt realize a term policy could go longer than 20 years, I will look into guaranteed renewable.

I am not hampered by detailed knowledge; my idea was to buy one-year or at least short-term policies frequently, giving flexibility. Cash value and level premium policies have a lock-in effect because you have put in money that you may not get back.

All opinions guaranteed worth price paid.

 

[teej1985]

Would the survivor get access to retiree health insurance? If so, I'd pick the pension over life insurnace every time.

 

[Slow But Steady]

Would the survivor get access to retiree health insurance? If so, I'd pick the pension over life insurnace every time.

When we reached Medicare age, my company kicked me off the retiree health plan and on to Uncle Sam. My wife's company did the same. They do give us about $100 a month to help with the Medicare premiums.

I suspect many companies are doing the same these days.

 

[Luvtoride]

Thank you for your reply, I haven't priced out the insurance yet but would only do this if the cost is less than the reduction in pension payments.

Ncc, that's exactly the correct way to evaluate this decision. If you can't purchase a significant life insurance policy with the monthly difference in benefits, then the whole exercise isn't worth pursuing.

We looked into doing something like this in anticipation of my pension when I plan to retire, but due to my age and health issues, buying a reasonably priced insurance policy is off the table.
Good luck.

 

[ivinsfan]

Would the survivor get access to retiree health insurance? If so, I'd pick the pension over life insurnace every time.

There is zero guarantee this would have to continue and isn't a major factor IMO.

 

[teej1985]

There is zero guarantee this would have to continue and isn't a major factor IMO.

If the federal government gets rid of lifetime subsidized health insurance, I would be less likely to stay with the government until retirement age.

Is is the most major factor.

 

[RetiredHappy]

If the federal government gets rid of lifetime subsidized health insurance, I would be less likely to stay with the government until retirement age.

Is is the most major factor.

I would take up a federal job just for the pension even if there is no lifetime subsidized health insurance.

 

[Dalmore]

I went through this last year.

DW has a nice pension, she is 6 years older than I and in good health. She also has longevity genes in her favor. But, with Covid and random life events, anything can happen.

I ended up doing 10yr and 25yr $500K policies on her. So for the first 10 years, we have $1M in coverage. If I die for whatever reason, she can cancel both policies and party with the benefit of her full pension (and my 401K) for the rest of her life, whereas if we had done the reduced pension, that deduction would continue for the rest of her life. Also, the two policies put together are about $5K cheaper per year than the payroll reduction would have been, saving us money.

 

[ivinsfan]

Dalmore it's very smart to ladder term, I can't see whole life being a better option.

 

[skyking1]

In my pension case it is spelled out pretty clearly.
Wife would have to sign away for me to get 100% of the pension.
If I pass any time in the first 5 years the 100% payment continues for a total of 5 years.
The default position is 50% survivor for a ~11% reduction.
We are opting for 75% survivor for a ~16% reduction.
It will amount to ~4K a month for us or 3K for her as the survivor.
We'd get ~$800 more a month by opting for no survivor, and I had not looked at it from an insurance standpoint.
I ran my numbers through State Farm's estimator, and got an estimate of 670.79 a month for 1 million for a 20 year term. That's interesting. I can see how it would work out.
We could play with the 50% survivor benefit and a smaller policy.

 

[Sunset]

......
I ended up doing 10yr and 25yr $500K policies on her. So for the first 10 years, we have $1M in coverage. If I die for whatever reason, she can cancel both policies and party with the benefit of her full pension (and my 401K) for the rest of her life, whereas if we had done the reduced pension, that deduction would continue for the rest of her life. Also, the two policies put together are about $5K cheaper per year than the payroll reduction would have been, saving us money.

Very clever, having a laddered approach. It makes me think a person could do a larger ladder with smaller rungs for a smoother decline in payout effect.

Example:
5yr @ $200K
10yr @ $200K
15yr @ $200K
20yr @ $200K
25yr @ $200K

 

[skyking1]

I looked at Dalmore's ladder. The estimator only offered 10 and 20 year terms for my age of 60.
I can get 500K +500K for $550

That looks really promising, thanks all for a productive discussion.
We'd gain about 3000 a year this way.

 

[Scuba]

Interesting thread, thank you, OP. We haven’t started my pension yet and I was thinking we’d go with 100% survivor benefit as DH has good longevity in his family and it would give him peace of mind. Hadn’t considered term life insurance as a replacement.