Many couples may find themselves confronted with a dilemma as retirement nears. If you plan to receive your pension payout monthly (rather than in a lump sum), you must decide whether you want to receive a higher payment during your lifetime (the life option) or a lower payment that will span the lifetimes of both you and your spouse (the joint and survivor option).
As you choose between these options, you will need to consider the current and anticipated health of both you and your spouse, as well as your life expectancies. You will also need to assess your financial situation and income requirements. Here is a brief look at each of these payout options:
Life Option. With this option, let’s assume you receive $1,700 per month for your lifetime. This will be higher than the amount you would receive with joint and survivor benefits, say by $475. If you live a long life, this extra $475 per month will undoubtedly come in handy. On the other hand, once you die, payments to your surviving spouse, who may live for many more years, will stop. This could have a significant impact on his or her standard of living.
Joint and Survivor Option. If you were to select the joint and survivor option, suppose you receive $1,225 per month ($475 less than with the life option). If you die before your spouse, payments to your surviving spouse will continue for his or her lifetime. This may help provide critical income for your surviving spouse, especially if he or she outlives you by many years. However, if your spouse dies before you, you cannot change your payout option, even though your reason for choosing the lower monthly benefit to protect your spouse’s long-term income is no longer applicable.
The Best of Both Worlds
Deciding between these options may leave you and your spouse feeling as though you are betting on each other’s lives. But, you need not be locked into an “either-or” situation. With proper planning, you may be able to have it both ways a higher monthly benefit now plus continuing income for your surviving spouse should you die first.
In structuring this approach, consider selecting the life option and using a portion of the higher monthly benefit to purchase a permanent life insurance policy on yourself. If you should die first, consider giving access to your surviving spouse to manage the insurance proceeds to help create monthly income, as needed. On the other hand, if your spouse should predecease you, consider canceling the policy and continue receiving the higher monthly pension benefit.
This strategy requires disciplined money management to achieve the desired results. First, your life insurance policy may lapse if the premiums are not paid. Second, a lump-sum death benefit must be properly managed to yield the anticipated income. Third, by waiving the spousal provision, your spouse may potentially lose other pension-related benefits, such as cost-of-living adjustments or company-sponsored health insurance. Finally, the issuance of a policy at a reasonable premium (which would depend on your age and health) is not guaranteed. Therefore, it is important to apply and verify that you qualify for the appropriate amount of life insurance before making the pension payout selection. If the premium consumes too much of your monthly payout, this strategy may not be feasible.
Consider All Your Options
When choosing between the life option or the joint and survivor payout option for your pension, coupling the life option with a life insurance policy may be appropriate. There are many factors to consider, including your age, your spouse’s age, your health, your actual pension benefit, and the insurance premium costs. It is always important to analyze your situation carefully with the assistance of your financial professional to help determine which approach may work best for you.
Most life insurance policies are subject to medical underwriting, and in some cases, financial underwriting. Life insurance products contain fees, such as mortality and expense charges, and may contain restrictions, such as surrender charges. If properly structured, proceeds from life insurance are generally income tax-free. Life insurance agents do not give tax or legal advice. Insurance product guarantees are backed by the financial strength and claims-paying ability of the issuing company. Product and feature availability may vary by state.
Insurance product guarantees are backed by the financial strength and claims-paying ability of the issuing company. Product and feature availability may vary by state.
This information is being provided only as a general source of information and is not intended to be the primary basis for investment or retirement planning decisions. It should not be construed as advice designed to meet the particular needs of an individual situation. Please seek the guidance of a financial professional regarding your particular financial concerns. Consult with your tax advisor or attorney regarding specific tax issues.