Insurance Policies for Pensions

By Business & Finance Last updated Tuesday, January/14/2025

Types of Pension Payments

In most cases, employers offer several choices, but they boil down to a lump-sum settlement, a single life payout or a joint and survivor pension payment. Not all pensions offer a lump-sum payment. The single option pays as long as you live and may include the option to guarantee a specified number of years of payments. A joint option continues to pay your spouse some or all of your pension after you pass. Choosing this option reduces your monthly check by a considerable amount.

Once you select a payout option, you can't change it. While you might sincerely want your spouse to have funds after you're deceased, you might not die first. For those that choose a joint and survivor option, if you're spouse passes first, you keep the lower payment for the rest of your life with no potential for a spousal benefit. In other words, you pay a monthly price for nothing in return.

A life insurance policy on your life can become your spouses pension if you don't take a joint and survivor option. This allows you to take the full pension. If you die before your spouse, the funds from the policy can become the spouse's money for a pension. If the spouse pre-deceases you, you can cash out the policy or simply change the beneficiary to the children. Either way, you then receive the maximum pension amount.

Since your decision is irreversible, before you make the final selection you need to shop for a policy, see if a life insurance policy is the best for your situation and make sure you qualify for life insurance. Once you know what the premiums will be, you can compare your monthly income from a full pension minus the insurance premiums with a difference in payment between a single and a joint and survivor pension selection. Make sure you use after-tax amounts to compare both. You also need to make sure you qualify for a life policy before you make your final selection. If you're in poor health, selecting the joint payout option may be your best choice.

You can use an online life insurance calculator to find how much money from life insurance you need to provide your spouse with a monthly amount equal to the survivor benefit of your pension. If you're contacting a life insurance company to find premiums, you also can find out how much money is necessary to purchase an immediate annuity that pays the same as the survivor benefit to your spouse.