How to Protect Your Spouse With Pension Options and Life Insurance

Planning for retirement involves more than determining how much income you will receive each month. Married couples also need to consider what will happen financially when one spouse passes away. If your retirement income depends heavily on a pension, choosing the right payout option can make a significant difference in your surviving spouse’s financial security.

For couples working with an estate planning attorney in Missouri, protecting a surviving spouse should be an important part of the overall estate planning process. One question worth asking before selecting your pension benefits is: Can I protect my spouse outside of my pension?

An article from Kiplinger’s, “Pension Lump Sum Option vs. Annuity Payment: Which Is Better?”, explores the choices retirees face when deciding how to receive their pension benefits. While selecting the highest possible monthly payment may seem appealing, couples should carefully consider how that decision could affect the surviving spouse.

There are two primary approaches to protecting your spouse when you begin receiving pension benefits.

Option 1: Take the Highest Pension Payment and Purchase Life Insurance Separately

One way to protect your spouse is to elect the single-life pension benefit, which generally provides the highest monthly payment, and purchase life insurance outside the pension plan.

With this approach, you receive the larger monthly pension payment and pay premiums on a separate life insurance policy. If you pass away first, the policy pays a death benefit to your designated beneficiary, which could be your spouse or, depending on your estate planning goals, your children.

This strategy offers several potential advantages:

• Higher monthly pension income: You receive the maximum available single-life pension benefit rather than accepting a reduced payment.

• Flexibility: Depending on the policy, you may be able to adjust or discontinue coverage if your financial circumstances change and the protection is no longer necessary.

• More beneficiary options: You can generally name your spouse, children, or other eligible beneficiaries on the life insurance policy.

• Separate financial protection: The insurance proceeds can provide your surviving spouse with money to replace some or all of the pension income that ends when you die.

However, purchasing insurance outside the pension requires careful planning. The policy must provide an appropriate amount of coverage for your family’s needs, and you must be able to maintain the premiums for as long as necessary.

You should also consider whether the policy is term or permanent insurance, how long coverage will last, and whether the death benefit will be sufficient when your spouse needs it.

If a policy expires, lapses because premiums are not paid, or provides inadequate coverage, your surviving spouse could face a substantial loss of retirement income.

Option 2: Choose a Joint-and-Survivor Pension Annuity

The second option is to purchase survivor protection directly through your pension plan by selecting a joint-and-survivor annuity.

With this arrangement, you agree to receive a reduced monthly pension payment while you are alive. In exchange, your surviving spouse continues receiving a designated portion of the pension after your death.

Depending on the pension plan, the surviving spouse may receive 50%, 75%, or even 100% of the original benefit.

The primary advantage is that your spouse has a continuing source of pension income without requiring a separate life insurance policy.

However, there are important considerations.

First, the reduced pension payment means you are effectively paying for survivor protection through a lower monthly benefit. Second, this arrangement generally provides the survivor benefit to one designated beneficiary. It does not automatically provide a separate death benefit for your children.

If leaving an inheritance to your children is also important, you should consider how this pension election fits into your overall estate plan.

The Hidden Cost of Buying Survivor Insurance Through Your Pension

One factor couples often overlook when choosing a joint-and-survivor annuity is the long-term cost of the reduced pension benefit.

If your pension includes a cost-of-living adjustment (COLA), the difference between the single-life benefit and the reduced joint-and-survivor benefit may become more significant over time.

For example, if the pension’s COLA is calculated using the reduced monthly benefit, your surviving spouse may ultimately receive less income than anticipated. The difference between the two payment amounts can compound over the years, creating a growing opportunity cost for choosing the survivor option.

There is another consideration: the longer the pension recipient lives, the longer the couple receives the reduced monthly payment before the survivor benefit begins.

In other words, you are giving up a portion of your pension every month during your lifetime to provide income protection that your spouse may not receive until you pass away.

This is an important distinction when comparing pension-based survivor protection with life insurance purchased separately. The two approaches have different costs, benefits, and risks.

Keep in mind that pension COLA provisions and survivor-benefit calculations vary by plan. Review your specific pension documents before making a decision.

How Do You Decide Which Pension Option Best Protects Your Spouse?

There is no single answer that works for every married couple. Your decision should reflect your retirement income needs, health, life expectancy, available assets, insurance costs, and the financial needs of your surviving spouse.

Before making your election, consider these questions:

• How much household income would your spouse need if you passed away first?

• Would Social Security, savings, investments, and other retirement income be enough to replace your lost pension?

• Could you qualify for an affordable life insurance policy outside the pension?

• Do you want your children or other family members to receive a portion of the financial protection?

• Does your pension provide cost-of-living adjustments, and how are they calculated for survivor benefits?

• What happens if your spouse passes away before you?

It is also important to understand that pension elections are often difficult or impossible to change once payments begin. Take time to review your options before signing the retirement paperwork.

A qualified financial advisor can help you compare the financial implications of each option and determine whether separate life insurance is appropriate. An estate planning attorney can help you coordinate those decisions with your wills, trusts, beneficiary designations, and other estate planning documents.

Protecting Your Spouse Should Be Part of Your Estate Plan

Your retirement decisions and estate plan should work together. Choosing the right pension option is one way to help protect your spouse, but it is not the only consideration.

You should also make sure your estate planning documents reflect your wishes and provide the necessary protections if you become incapacitated or pass away.

At Beck, Lenox & Stolzer Estate Planning & Elder Law, LLC, we help Missouri families think through the important decisions involved in protecting their loved ones and planning for the future.

Whether you are approaching retirement, already receiving pension benefits, or reviewing an existing estate plan, taking the time to understand your options can help prevent unnecessary financial hardships for your family.

Our team can also help connect you with a financial advisor when appropriate so you can evaluate your retirement and insurance options as part of a coordinated plan.

Frequently Asked Questions About Protecting Your Spouse With Pension Options

1. What is the difference between a single-life pension and a joint-and-survivor pension?

A single-life pension generally provides the highest monthly payment but typically stops when the pension recipient dies. A joint-and-survivor pension provides a reduced monthly payment during the recipient’s lifetime in exchange for continuing some or all of the pension income to the surviving spouse after death.

2. Can I take the higher single-life pension payment and use life insurance to protect my spouse?

Yes. You may be able to elect the higher single-life pension payment and purchase a separate life insurance policy. The death benefit can provide money to your surviving spouse or other beneficiaries. However, you must consider the cost, duration, and adequacy of the insurance coverage.

3. Is purchasing life insurance outside my pension better than choosing a joint-and-survivor annuity?

Not necessarily. Each option has advantages and disadvantages. Separate life insurance may offer greater beneficiary flexibility and allow you to retain a higher monthly pension payment. A joint-and-survivor annuity provides continuing pension income without requiring a separate insurance policy. Your health, insurance eligibility, pension provisions, and family’s financial needs should all factor into the decision.

4. Should my pension election be included in my estate planning?

Absolutely. Your pension election can significantly affect your surviving spouse’s financial security and the inheritance available to your children. Coordinating your pension benefits with your life insurance, wills, trusts, and beneficiary designations can help ensure your overall estate plan reflects your wishes.

Contact Our Missouri Estate Planning Attorneys

Protecting your spouse is one of the most important reasons to plan ahead. Understanding your pension options, considering life insurance outside your pension, and coordinating these decisions with your estate plan can help provide greater financial security for the people you love.

Contact Beck, Lenox & Stolzer Estate Planning & Elder Law, LLC for all of your estate planning needs by booking a call: https://beckelderlaw.com/book-a-call/

Reference: Kiplinger (Jan. 27, 2023) “Pension Lump Sum Option vs. Annuity Payment: Which Is Better?”