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estate planning and elder law

Can I Protect My Spouse Outside My Pension?

Avoid Retirement Planning Mistakes
A single-life annuity option is often your highest monthly benefit and is the quickest way to get the most from the pension in the shortest period of time. The downside to electing this option is that it can leave your spouse with an income shortage because payments would stop after your passing. That is why if you are married and choose to make this election, your spouse must sign off on that decision.

Beck, Lenox & Stolzer Estate Planning and Elder Law offers Kiplinger’s recent article entitled “Pension Lump Sum Option vs. Annuity Payment: Which Is Better?” While many couples want the highest amount of income possible in retirement, they should weigh what happens when the spouse getting the pension passes away. To prepare, while both are living, the question should be asked, “Can I protect my spouse outside my pension?”  This article states that you have two options to protect your spouse:

The first option is to purchase insurance outside the pension, accept the single-life benefit and take the highest annuity payment. You’d then pay a premium to an insurance contract that would pay a lump sum to the surviving spouse or children, if you predecease them. This also gives you the flexibility of canceling the policy if circumstances change and the benefit is no longer needed.

A second option is to buy insurance through the pension. You’d opt for a joint-and-survivor annuity, electing to take a reduced annuity payment in exchange for the benefit to continue to your spouse if you predecease them. You are, therefore, paying for the insurance with your lower benefit amount. Note that this benefit has only one beneficiary, so it will disinherit the children if you use this option.

An important factor when electing a joint-and-survivor annuity is the cost of buying the insurance through the pension. While you have premiums in either scenario, when it’s purchased within a pension, there are unique circumstances that most overlook.

If your pension has a cost-of-living adjustment added to it, you should see that because a joint-and-survivor benefit is lower, it’ll receive a smaller cost-of-living increase than a single-life benefit would. This means that the difference between the maximum and reduced benefits would be compounded over time. That results in an ever-increasing cost for the insurance against inflation.

The longer the pension recipient lives, the fewer years the spouse receives the insurance from the pension. When you think about this, buying the insurance from the pension means you’re accepting an arrangement where you’re paying an ever-increasing monthly premium for a decreasing benefit. Unlike a life insurance policy bought outside of the pension system, the spouse’s pension insurance only extends to that person unless you were to name a child as the beneficiary.

If you want to buy insurance outside the pension system, the type of policy you get and the amount of insurance must align with what you need to protect your family. A mistake in this process can leave your policy at risk of lapsing or expiring. This would result in your spouse being vulnerable to a significant income gap.

You owe it to your spouse to consult with your financial advisor on what would work best for the two of you in retirement, and how your pension can protect your spouse if you die first.

If you need a referral to an advisor, Beck, Lenox & Stolzer can help with that. Our website now allows you to send a Contact Us form through our website, as well as schedule a free phone call with one of our attorneys if you need estate planning assistance.  Use the appropriate link here.  Contact Us form  Book-A-Call

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

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