Stretch Your Pension to Two Lives

When a person retirees from an employer with a pension plan, the retiree is typically offered to receive payments over his own lie or over the life of he and his spouse (i.e. joint life payout). The single life option is most popular because the monthly pension payment is higher.

Therefore, it's common to find two spouses and one has a pension that stops when the pension recipient dies. Yet both spouses rely on that pension income for their living needs. Here's a simple and easy solution that makes economic sense and saves financial hardship for the surviving spouse. The inexpensive way to protect against financial hardship is to own term life insurance to replace the pension income.

Earlier this year, I obtained a $100,000 policy for a 70-year-old male for a premium less than $200 monthly (20 year level term). Of his $1,200 monthly pension, we used less than $200 to pay the premium and slightly reduced their household spendable income. But here's what we gained.

If he predeceases his wife (women statistically outlive men by 7 years) , his wife will receive this $100,000 tax free from the insurance policy. Assuming she is age 80 at the time he passes, the $100,000 invested for income in a life annuity, gives her $1000 monthly of income to offset the loss of his pension (most of the monthly payment is tax free). Alternatively, she could invest in a fixed income investment at a hypothetical 6%, enjoy $500 monthly and dip into principal when and if needed. In this scenario, there are potentially funds remaining for her heirs.

How much does your household income change if either spouse passes away and a pension or social security check disappears? Now may be the time to make an inexpensive financial commitment to guard against financial hardship for the surviving spouse.