Pension with Survivor Benefit or Buy Life Insurance?

[pb4uski]

OP, I think what you want to do is to look at the cost of a term life insurance ladder of guaranted renewable term policies in 5 or 10 year increments. The reason for the ladder is because if you pass later then the cost of replacing the pension that goes away is lower because there are less remaining years to be covered. So while you might need $1 million today to cover the difference, in 20 years it might be significantly less than $1 milion so it would be wasteful to still be buying $1m of life insurance when you need less to fund the gap.

https://obliviousinvestor.com/laddering-life-insurance-policies/

 

[Ncc1701]

Thanks all for your thoughts. It seems that guaranteed renewable is not level. Meaning the annual premium will increase every year with age. This adds an unpredictable expense unless they can provide an illustration of exactly what the premium will be and I doubt that can happen.

Based on all of your input, I think the best thing to do is look at the premium difference between a term and permanent policy and see what that difference invested over a 20 year period of time can accumulate to.

So my only question is do I wait 3 years to do that exercise or do it now while she is younger?

Also, at retirement, I'll be 52. A 20 year term policy only takes me to 72 which could leave me without DW's pension payments or insurance for potentially an additional 20 years if I live that long. That is why I was looking at a permanent policy.

 

[Gumby]

The young wife and I retired 2 years ago (at 60/58), and we have done some of both. Currently, we have two COLA'd pensions (hers is about 3.5 times mine) and I started social security this year. We both took the 100% survivor option on our pensions, which reduced the payout by about 9%. However, even as reduced for the cost of the survivor benefit, our income is enough to more than fund our current lifestyle (so our current portfolio withdrawal rate is actually negative). The young wife is not eligible for Social Security on her own record and will not receive a spousal or survivor benefit due to the GPO. To make up for the loss of SS income should I predecease her (which is the more likely scenario), I have a large paid up whole life policy. I started that policy when I was 43 years old and paid over 15 years just for this reason.

My goal in all of this was to ensure that household income would not change when one of us dies. It will be hard enough to handle the loss of our spouse. We won't want to worry about a sudden loss of income at the same time. In my view, the goal is not to have the maximum amount of money, just to have enough money and some peace of mind. And we will.

I realize it is too late for you to do the whole life policy and you'll need to evaluate term policies, but that might be something for younger people to consider.

 

[brett]

We looked closely at this a number of years ago.

We looked at term life that was half or less than half of the commuted value of my pension.

Two reasons for this. The value of the pension stream of future payments decreases as we age. The second reason was that in our jurisdiction pension income is taxable, insurance payments are not. We tried to look at this from an after tax perspective.

We decided to go with the pension. My case was a little unusual. One reason was that one third of the commuted value would have been taxable in my hands. Only the remaining 2/3 could be rolled over.

 

[Dalmore]

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.

I was able to find a 25 year with Pacific Life. They are hard to come by at 60, but they do exist.

 

[ivinsfan]

To answer your question about when, it isn't the cost as much as it is not seeing the future and knowing your spouse will qualify for term when you need to buy it.


Once you make up your mind to buy it I would just pull the trigger and do it. Also be advised you won't know the actual cost until the insurance company see the state of your spouse health...some things can move you up into the next tier of costs. This is another reason why you would buy it before you make the pension election.


You don't mention if your DW's pension is COLAd

 

[1242Vintage]

Retired 18 months ago at age 57. My pension is much larger than wife’s pension and has a built-in COLA.

We were surprised that the reduced amount to get the survivor benefit on my pension was very modest, about 10% less. Her pension is very small, about 10% of mine.

So we took the survivor benefit on my pension since it funds the majority of our monthly income. We took the unmodified (non-survivor) on hers, since it’s small.

So if I pass first, she will continue to receive both pensions in the same amount as today. If she passes first, her pension terminates and mine goes up to the full unmodified amount.

Encourage you to get a pension estimate for any/all alternatives. The estimate helped us work through our options.

 

[Dalmore]

To answer your question about when, it isn't the cost as much as it is not seeing the future and knowing your spouse will qualify for term when you need to buy it.


Once you make up your mind to buy it I would just pull the trigger and do it. Also be advised you won't know the actual cost until the insurance company see the state of your spouse health...some things can move you up into the next tier of costs. This is another reason why you would buy it before you make the pension election.

d

+1

 

[Ncc1701]

To answer your question about when, it isn't the cost as much as it is not seeing the future and knowing your spouse will qualify for term when you need to buy it.


Once you make up your mind to buy it I would just pull the trigger and do it. Also be advised you won't know the actual cost until the insurance company see the state of your spouse health...some things can move you up into the next tier of costs. This is another reason why you would buy it before you make the pension election.


You don't mention if your DW's pension is COLAd

Thank you for the advice! No her pension does not have a COLA.
And because the pension comes from a municipality, I can go on the website and it gives me the figures for the different survivor options (full, 75%, 50% etc...)

 

[Sunset]

I have known a couple of cases of where the insurance company refused/delayed for many years paying out on life insurance. Where the insurance was purchased a couple of decades before the death.

So from my personal perspective, if the numbers come out close percentage wise, I'd skip the insurance because when a claimant is old, and needs the money, it's hard to fight and stand your ground for the full payout. The insurance companies know this.

 

[pacergal]

We looked at this several years ago. We both have govt pensions, with max COLA at 2%.
We chose 100% survivor for both. The reductions in payout were not that much different and the pensions at 100% survivor cover our budget. We have SS and investments as needed.

We looked at life insurance, but cost were a consideration, given a 20-30 year term at that time got us to 70-80. Renewing that at that advanced age was quite expensive. Family history, SS and other age calculators have us anywhere mid 80-mid 90 life expectancy.

 

[skyking1]

My pension has pretty stiff reductions for the survivor tiers. It makes the insurance idea a little sweeter.
Working backwards from examples in my pension booklet:
50% =10.7% reduction
75% =15.3% reduction
100% = 19.4% reduction

No COLA, unless I choose that. It is another substantial deduction from the base rate to begin with, and it looks like a fool's errand to secure a COLA that way.

 

[pb4uski]

I have known a couple of cases of where the insurance company refused/delayed for many years paying out on life insurance. ...

A couple different cases? Or more than one case for the same insured?

Typically a death certificate is pretty definitive absent extenuating circumstances.

Insurers rarely can get away with refusing or delaying life insurance claims, one complaint to the state's insurance regulator is usually all it takes to expedite things.

 

[teej1985]

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

If they nerf the retiree health insurance, I'll retire much earlier.

 

[teej1985]

Thanks all for your thoughts. It seems that guaranteed renewable is not level. Meaning the annual premium will increase every year with age. This adds an unpredictable expense unless they can provide an illustration of exactly what the premium will be and I doubt that can happen.

Based on all of your input, I think the best thing to do is look at the premium difference between a term and permanent policy and see what that difference invested over a 20 year period of time can accumulate to.

So my only question is do I wait 3 years to do that exercise or do it now while she is younger?

Also, at retirement, I'll be 52. A 20 year term policy only takes me to 72 which could leave me without DW's pension payments or insurance for potentially an additional 20 years if I live that long. That is why I was looking at a permanent policy.

Either way, insurance is going to be extremely expensive in one's 50's because one is more likely to die. Buying term insurance to replace a lifelong income stream does not make any sense to me. Buying permanent insurance makes even less sense because the cost from your nest egg will be prohibitive.

 

[Ncc1701]

Either way, insurance is going to be extremely expensive in one's 50's because one is more likely to die. Buying term insurance to replace a lifelong income stream does not make any sense to me. Buying permanent insurance makes even less sense because the cost from your nest egg will be prohibitive.

It certainly is starting to look that way. I went to a website called policygenius.com, plugged in some numbers and they were quoting around $750/month for a permanent policy, 30 year term was not that much better.

That's more than the $500/month or so reduction in pension benefits with the survivor option.

 

[Sunset]

A couple different cases? Or more than one case for the same insured?

Typically a death certificate is pretty definitive absent extenuating circumstances.

Insurers rarely can get away with refusing or delaying life insurance claims, one complaint to the state's insurance regulator is usually all it takes to expedite things.

Two separate cases, one was my best friend's father's death. He bought the policy 20->25 yrs before he collapsed dead from a heart attack. The insurance company said they didn't have to pay as he died of a heart attack, so obviously he lied 20 years earlier when he signed up for the policy and said he had no heart issues... Widow had to get a lawyer, then the insurance company offered 50%.. . That is the last I heard of it, so I don't know what she ended up with.

Second case was told to me by an ex-insurance claim worker, who quit because they were told to do all sorts of slimy (IMHO) actions to delay delay delay the claim of life insurance, for a bonus in salary. They delayed 1 claim so long the Widow herself died before collecting on the dead husband. The dead Widow's children then had to continue the lawsuit to try to force the insurance company to pay. Meanwhile, the insurance claim workers on the case collected their bonuses for "delaying the payments" .

Insurance companies save tens of Millions of dollars by not paying claims each year. A favorite trick is to just ignore the death of a person.
https://www.huffpost.com/entry/insurance-industry-fails_b_4235972

 

[ncbill]

It certainly is starting to look that way. I went to a website called policygenius.com, plugged in some numbers and they were quoting around $750/month for a permanent policy, 30 year term was not that much better.

That's more than the $500/month or so reduction in pension benefits with the survivor option.

Shorten your horizon to 15-20 years & calculate if projected portfolio growth should be sufficient by end of term?

IIRC, most online sites don't "instant quote" annual renewable term (ART) so you'll have to provide your personal info then interact via phone/email with a broker.

 

[pb4uski]

Two separate cases, one was my best friend's father's death. He bought the policy 20->25 yrs before he collapsed dead from a heart attack. The insurance company said they didn't have to pay as he died of a heart attack, so obviously he lied 20 years earlier when he signed up for the policy and said he had no heart issues... Widow had to get a lawyer, then the insurance company offered 50%.. . That is the last I heard of it, so I don't know what she ended up with.

Second case was told to me by an ex-insurance claim worker, who quit because they were told to do all sorts of slimy (IMHO) actions to delay delay delay the claim of life insurance, for a bonus in salary. They delayed 1 claim so long the Widow herself died before collecting on the dead husband. The dead Widow's children then had to continue the lawsuit to try to force the insurance company to pay. Meanwhile, the insurance claim workers on the case collected their bonuses for "delaying the payments" .

Insurance companies save tens of Millions of dollars by not paying claims each year. A favorite trick is to just ignore the death of a person.
https://www.huffpost.com/entry/insurance-industry-fails_b_4235972

That's outrageous, and unheard of in my experience... albeit, 30 years ago I remember having to sign checks (second signature) for bigger claims. I'd scan the file and if there was a death certificate that was good enough for me.

Do you recall what companies?

BTW, the article is a totally different story, less about denying or delaying claims made and more about the fact that they didn't pay claims for people that they would have known had died from various databases that they have access to because the heirs never filed a claim... and as a result some reforms were enacted.

 

[skyking1]

Thank you Ncc1701, I went to policygenius and made a rough estimate of $740 cost per month to do a ladder of 300K at 10,15,20,25 years.
That's about the reduction we are looking at for a 75% survivor benefit.
After 10 years the cost would be down ~100
After 15 years the cost would drop another ~140

So I look at what it replaces.
@75%, her survivor benefit is 36K a year and taxable.
It seems to pencil out on the first two rungs of the ladder easily.
We have never been insured for more than what an employer has offered. It is something to ponder.

 

[Sunset]

That's outrageous, and unheard of in my experience... albeit, 30 years ago I remember having to sign checks (second signature) for bigger claims. I'd scan the file and if there was a death certificate that was good enough for me.

Do you recall what companies?

BTW, the article is a totally different story, less about denying or delaying claims made and more about the fact that they didn't pay claims for people that they would have known had died from various databases that they have access to because the heirs never filed a claim... and as a result some reforms were enacted.

I agree it's outrageous, and did make me have less faith in insurance.

It was in the late 80's and early 90's and I don't remember the company names in either case.

I was actually expecting some hassle / resistance when I filed all the papers for my FIL's death.
Especially when the insurance company said they would mail me the forms to claim, and then nothing showed up in the mailbox weeks later. I phoned them again figuring they were stalling, and the person said "maybe it got lost in the mail", so I asked them to email me the forms and they did immediately.
Once the forms were filled out, etc, I faxed it all in and they paid within 2 weeks to the heirs.
So it worked out just fine.

I did work at an insurance company for a short time, in Baltimore, in the early 2000's , and everyone I met seemed to be really nice and not out to screw over old folks. Perhaps my early experience was just bad folks in a small part of a company, I'm sure it happens in lots of industries.

 

[pb4uski]

Yeah, the whole delaying paying out death benefits is a strange one to me. When I was with my former employer, we had plenty of liquidity, so cash flow wouldn't be a reason to delay paying claims. Due to the interaction with benefit reserves it would have negligible bottom line impact (but few people might have understood that). There would be no good reason to delay.

And as I recall we credited interest to the beneficiaries from the date of death so nothing to gain.

Besides, that was our whole purpose... to take in money, shuffle paper and pay out money... that's just what insurers do.

 

[SnowballCamper]

Either way, insurance is going to be extremely expensive in one's 50's because one is more likely to die. Buying term insurance to replace a lifelong income stream does not make any sense to me. Buying permanent insurance makes even less sense because the cost from your nest egg will be prohibitive.

Yes, a pension survivor benefit is not the same as insurance, but in a way they do the same thing, provide for a surviving spouse.

We elected for the survivor benefit, but do have some smaller whole life policies as well.

I think the merit of the survivor benefit is the fixed cost going forward, and for us as younger military retirees, the lifetime benefit could be up to 40+ years if one of us died unexpectedly soon.

I would avoid the unknown future insurance costs for a known fixed cost going forward.

 

[youbet]

Insurance companies save tens of Millions of dollars by not paying claims each year. A favorite trick is to just ignore the death of a person.
https://www.huffpost.com/entry/insurance-industry-fails_b_4235972

I was curious as to what "ignore the death of a person" meant so I skimmed the article. It doesn't mean they deny ("ignore") a legitimate claim submitted by a beneficiary. It means that they don't independently determine the living or dead status of an insured and then notify the beneficiary of the death and that they'll be receiving a check.

Frankly, this is the way I thought it always worked. For example, I assume that if I keep my policies a secret and therefore when I die no one submits a claim, the insurance company will not ferret this out in order to ensure they pay someone. Therefore I have my insurance policies carefully documented and DW (primary beneficiary) and DS (secondary beneficiary) have all the details to submit a claim as soon as they can obtain a death certificate. I've never for a minute assumed that when I die, even if no claim is submitted, the insurance company would move independently on their own to determine I was dead and then pay my beneficiary.

 

[Brat]

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

CSRS pensions are no more. Today's hires have a very modest pension and the equivalent of an IRA.