Some pension options are better than others.
True, the amount of money a person makes is important.
However, it is also important how this money is handled.
Depending on your choices, you may either increase or decrease the funds available.
According to a recent Kiplinger article titled “Pension Lump Sum Option vs. Annuity Payment: Which Is Better?,” those who receive a pension have important decisions to make.
This is especially the case if you would like to provide for your spouse if you predecease.
Generally, two options are available to help you meet this financial security goal.
First, you can accept the single-life benefit and take the highest annuity payment.
This requires your spouse to waive their spousal right to your pension in writing.
If your spouse does waive this right, then you should consider purchasing a life insurance policy independently and pay premiums the premiums out of your increased payout from the single-life pension benefit.
That way your surviving spouse or your children will receive the life insurance benefit in a single sum if you die first.
The policy can be canceled if it is no longer needed or if situations change.
Warning: before your spouse irrevocably waives their right to your pension, make sure you are insurable!
What is the second option?
“Insurance” can be purchased through the pension.
To do this, you would select the joint-and-survivor annuity option.
You would then elect to take a reduced payment now so the benefit would continue for your spouse when you die.
In this case, you are in essence paying for the insurance with a lower benefit amount and your children will not be able to receive the benefit should you die.
Essentially, you would be disinheriting your children because a pension contract does not continue for descendants.
Although insurance premiums are necessary for either of these options, the cost of living increase will be less for the joint-and-survivor benefit than it would be for the single-life benefit.
The differences between these two benefits would grow larger over time.
As a result, you will be paying more in monthly premiums for a benefit with decreasing value.
Unlike insurance purchased outside of the pension, only one person can be named as the beneficiary of the pension insurance – your spouse.
If you choose to purchase private insurance, be sure the amount is commensurate with what your family needs.
Making mistakes when purchasing insurance can leave your spouse and children vulnerable in the absence of your income.
This has been a very simplified overview of a rather complex financial subject matter.
Before taking action, consult with your CPA and financial advisor to run the numbers and get their advice.
Reference: Kiplinger (Jan. 27, 2023) “Pension Lump Sum Option vs. Annuity Payment: Which Is Better?”