Many pension programs both in the private and public sector offer a “Spousal Survivor Benefit.” If the primary pensioner dies first—the spouse gets a percentage, usually not all, of the regular monthly pension received before death.
If selected, this nice benefit comes at a not-so-nice cost. The provider of the monthly pension is now going to be paying for an additional person. Think of it as an extra “insurance policy” on the surviving spouse. Like any insurance policy, there is a cost associated to provide the benefit. Typically, this cost is charged against the gross monthly pension and is usually around 10% of that gross figure. The pensioner then receives 10% less each month as long as he/she is alive. Upon death, the survivor then receives a percentage, like 50%, of the gross amount.
Example: $1,800.00, regular gross monthly pension – $180.00, 10% charge for the Spousal Survivor Benefit equals $1620.00 received by the pensioner until death. Upon death–$900.00 (50%) received by the survivor spouse.
These figures and percentages can vary, but this is a typical and realistic scenario. Of course, we all want to do right by our spouses. We want to leave them as well off as possible in the event of an untimely (or even timely) death. The emotions of the moment take over, and we often “knee-jerk” our way into signing up for the Spousal Survivor Benefit without thinking too deeply about the larger picture
Can you do better for your spouse? Can you do MORE with the same cost, or better yet, even MORE with LESS? Often, the answer to all these questions is YES! In the above example, the survivor will get $900/month for life–$10,800 per year, and all of it is fully taxable.
Even with the new tax rates in place, the survivor is probably on the hook for maybe 12% in tax. That leaves $792 after tax for the survivor per month ($9504/yr.) If that surviving spouse goes on to live another ten years, he/she will have received $95,040 over the remaining lifetime; $190,080 if one lives twenty years longer.
Now, think outside the Spousal Survivor Benefit “box.” Consider what the monthly premium might be for a ten year, 20 years, or even 30-year term life insurance policy? If one has reasonably-good health, you’ll be able to secure a term life policy at a monthly rate far less than the cost of the Spousal Survivor Benefit being deducted from your pension.
With such a strategy, you and your spouse are benefitted in several ways:
1.) You keep the entire amount of your pension.
2.) You save money by paying less for this new life insurance policy.
3.) Upon death, your spouse receives a lump sum benefit immediately-TAX FREE!
4.) A lump sum leaves your spouse with more options for the future than monthly checks.
Many would stop right here and think that this idea does make more sense, but let’s take it one step further. Your spouse now takes that tax-free, lump sum insurance pay-out and turns it into a Fixed Annuity that will likely pay your spouse a higher amount than what he/she will receive from the traditional Spousal Survivor Benefit payment available.
Talk with an agent that understands this concept. Get some realistic life insurance quotes and make some reasonable comparisons.
See if you can’t maximize your pension and leave your spouse a better benefit at the least possible cost.