If your current job makes you eligible to receive a pension when you retire – then life insurance could play a prominent role in how much income your pension will provide you.
Most pensions work the same are structured the very similarly.
Your pension will be broken down into different options when you retire.
The ‘max pension option’ will provide you with the highest income for which you are eligible. All the other options – called “Survivorship options” – will provide an income less than the max option.
The ‘max pension option’ will provide you with income until you pass away. Once you pass away, your pension income goes away – it will not be passed on to your spouse or children.
Survivorship Options provide a safety net for your spouse – if you pass away and you have a survivorship option – your spouse will receive a pension income for as long as she lives.
Let’s use an example…
Say, when you retire you learn that your max pension option is $40,000 a year – you will receive $40k for as long as you live. However, whenever you pass away – 3 years in to retirement or 33 years into retirement – that $40k dies with you – and your spouse will receive no income once you die.
Now, most pensioners have spouses and kids – so many times that scenario can make a family nervous because everything is riding on the pensioner living a long life in retirement. This is why pensions also offer a Survivorship Option – which allows your spouse to receive your pension income should you pass away. However, if you chose the Survivorship Option instead of the max option, you are agreeing to take less yearly income to account for the ability for your spouse to carry on your income should you pass away.
So, whereas your max option will provide a $40k annual income – a Survivorship Option could provide you with $32k of annual income. So instead of $40k a year – you start your retirement at $32k a year – and whenever you pass away your spouse will receive $32k for her lifetime – that’s a large decrease but at least your spouse is protected.
Now, let’s consider some possible scenarios…
First, best case – you retire at 55 and live 30 years in retirement. That’s great. But – earning $32k instead of the $40k – you left $8k a year on the table for 30 years or $240k – that’s a lot of money that you earned while working and were eligible to receive – that you never got.
Another scenario could be – four years into retirement where you are collecting $32k a year – God forbid – your spouse passes away. Now you are stuck at the $32k a year – and when you die the $32k dies with you – you cannot pass that income on to your kids – it was only to provide for your spouse.
Now, some Survivorship Option provide for what’s called a Pop Up option – which pops your income back up to the $40k – should your spouse predecease you – but to have a Pop Up option – that will cost you even more than the $8k difference – so your income could be $30k a year to start instead of the $32k. And if you take the $30k with the Pop Up and you live both live 30 years in retirement – you just sacrificed $10k a year for 30 years or $300,000.
This is where life insurance can play a big role.
Let’s say you have the right amount of life insurance coverage in place. This will allow you to take the max option of $40k a year – which you worked hard to earn. And whenever you pass away the life insurance kicks in to provide for your spouse.
Under that first scenario – where you both live 30 years in retirement? Well, at least you banked the $40k which was the full pension that you earned and didn’t leave that $8k on the table every year.
By taking the max pension protected by life insurance – if your spouse predeceases you – well you are still at the $40k and you can redirect the life insurance to your kids or grandkids as beneficiaries – or you can now drop the life insurance coverage. If you had taken the $32k option to protect your spouse and your spouse predeceases you – you cannot redirect the $32k to your kids – it was only for your spouse.
By taking the $32k a year in instead of the $40k to protect your spouse – you’re essentially spending $8k a year for that protection. And once you chose your option – it’s locked in – there’s no changing it.
Again, these numbers are just for example purposes only – everyone’s pension numbers are unique to their own situation.
But, having life insurance in place as a pensioner can often times be a much cheaper option to protect your spouse – and it provides a lot more flexibility in retirement as life takes its twists and turns.