05/22/2025
Should I Get a Life Insurance Policy Instead of Choosing a Survivorship Option on My Pension?
This is a question that we get asked time and time again. The thought behind it is that the person doesn't want to take a reduced monthly pension benefit (survivorship option) in retirement, but also still wants to provide something (life insurance death benefit) for their spouse if they should pass away prematurely.
There are four LEOFF II pension monthly benefit options at retirement:
1. Single Life, which provides the largest benefit, but stops paying out when you pass.
2. 100% Survivorship Option, which provides a reduced benefit, but continues to pay out 100% of that benefit to your spouse for the rest of their life, if you should pass away.
3. 66.67% Survivorship Option, which provides a reduced benefit, but continues to pay out 66.67% of that benefit to your spouse for the rest of their life, if you should pass away.
4. 50% Survivorship Option, which provides a reduced benefit, but continues to pay out 50% of that benefit to your spouse for the rest of their life, if you should pass away.
The answer to this question is not a "one size fits all" answer. It's instead dependent on multiple factors.
1. What does it cost to run your household if you were gone?
-Does your spouse have sufficient long-term income to cover these expenses?
-Are they planning to continue to work in a high earning career for the foreseeable future?
-Do they have their own pension or large social security benefit that could be coupled with savings to cover expenses?
2. Do you have sufficient savings or pools of funds to cover your spouse's expenses if you were gone?
-Do you or your spouse have large retirement account balances?
-Will your spouse be receiving a large inheritance in the near term to be able to cover expenses?
-There is a golden rule that financial advisors use that is referred to as the 4% rule. This essentially means that historically, you can typically withdraw 4% annually from the value of an invested and well-diversified portfolio forever and you will never drain the principal of that account. This can be used to subsidize a gap in your spouses income and expenses. So let's say that your annual expenses are $120,000 a year. In order to utilize the 4% rule to allow annual distributions of $120,000, you would need a pool of $3,000,000 dollars invested and diversified in the markets.
3. Will your spouse be able to steward a large sum of money and make consistent, sound financial decisions to ensure that those funds will last them for the rest of their life?
-We have unfortunately seen some bad cases of people choosing a life insurance option as opposed to a pension survivorship option, and when they passed, their spouse depleted their retirement account balances and the life insurance death benefit in just a few years, leaving them in a devastating financial situation.
With this in mind, extensive conversations should be had to make sure you and your spouse are clear about what the financial strategy would be in the event that you passed away.
Additionally, there are other considerations to think about as well:
1. The cost of the life insurance policy.
-Depending on the value of the life insurance policy, how old you are and how healthy you are, the monthly premium of that policy could range from $500 a month to thousands of dollars a month, which could be a greater amount or close to the amount that you would be losing by just choosing the survivorship option.
2. What happens if you die after your term policy ends?
-If you chose no survivorship benefit on your pension and instead got a 20-year term policy and then die after that term ends, your spouse now gets no monthly pension benefit and no death benefit from the insurance policy.
-If your term life insurance policy ended and then you tried to get another term life policy, chances are you wouldn't even be eligible for coverage, and if somehow you were, the monthly premiums would be around $5,000+, which at that point would simply not make financial sense.
3. A life insurance death benefit is not inflation adjusted.
-In the 4% rule example, I explained how you could withdraw $120,000 a year out of an invested, diversified pool of $3,000,000 and never run out of money. However, this does not account for inflation. Assuming an average annual COLA adjustment of 3.42%, if someone's living expenses were $120,000 at the start of the policy, in 20 years their inflation adjusted living expenses would jump closer to $230,000 a year and continue to go up after that. At that point, the $120,000 your spouse could pull each year wouldn't come close to covering their living expenses.
-This wouldn't be an issue if your life insurance death benefit was adjusted with inflation, but unfortunately it is not. If you bought a policy today and then died 20 years later, the $3,000,000 policy you get today, would still just pay a $3,000,000 death benefit 20 years from now when you pass.
-So, you must not only think about how much money your spouse would need in today's dollars, but also how much they would need in the inflation adjusted future, when you pass.
With all of these factors in mind, we typically don't recommend the route of choosing a life insurance policy in the place of a LEOFF II pension survivorship option. However, there are instances where it could be the right decision depending on your family's unique financial situation.
If you would ever like to meet with us and discuss these considerations or help you to map out and plan a successful retirement, we would love to meet with you. To schedule a free consultation, click the link below or give us a call at 360-825-2080.
https://firewallcapital.com/contact
-Firefighters Retirement Planning Group
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