Should Life Insurance Be Used to Supplement a Single-Life Pension?

“When claiming my pension benefits, should I claim a spousal benefit, or should I take the single-life option and purchase a life insurance policy to protect my spouse if I die first?”

It’s a question we’ve heard a lot over the years, and it’s a question one of our listeners posed on the radio several weeks ago. It’s such a great question that we wanted to cover it in our column this week.

First, a little context: When you claim your pension benefits, you’ll be faced with a number of decisions. One of the most important decisions is choosing whether you should claim single-life or joint-and-survivor benefits.

With the single-life option, you’ll get 100% of your earned benefits, but those benefits stop after you die. The joint-and-survivor option will reduce your monthly benefit, but those benefits will be paid throughout your and your spouse’s lifetimes.

This leads us back to our original question of whether a pension beneficiary should opt for the single-life option and take out a life insurance policy to provide financial security for their spouse. More often than not, after careful analysis by our roundtable team of specialists, this strategy does not provide the best odds of success for our clients.

To make it work from a cost standpoint, you’d have to use a term policy since the premiums on term policies are much cheaper than comparable permanent policies. The problem with using term insurance is that there is a very small chance that the policy will actually pay. The overwhelming majority of those who purchase term policies outlive the term of the coverage, meaning that after the term, you’ll have no life insurance and no pension benefits for your spouse. Seeing as one of the goals of this strategy is to provide financial security for your spouse, you’d likely have to look into a permanent policy.

Permanent policies will give you assurance that your policy will be there for your spouse even after you’re gone, but the cost of the premiums will likely be too prohibitive to make sense financially. Those high premiums will become even more expensive if you aren’t in the best of health, making it even more unlikely that the cost of the policy will be justifiable. And even if you have great health and are able to qualify for the top underwriting designation, it’s still not a given that you’ll be better off purchasing a policy.

We’re both big fans of life insurance and view it as a great tool for comprehensive financial planning, and there many times when it may make sense to purchase a policy as you head into retirement. But if the only reason you’re buying life insurance is to supplement a pension, you may want to think again.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Please consult with an advisor about what is best for your specific situation.

This article originally appeared on November 1, 2015 in the Brainerd Dispatch. You may view the article here.