Using term life to hedge a spouse's pension?

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momvesting
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Using term life to hedge a spouse's pension?

Post by momvesting »

We are still several years away, but I'm starting to run some retirement scenarios for my husband and I. His pension has various options including partial lump sums and 100%, 50%, or 0% payments to surviving spouse. Because a significant amount of our retirement income will come from this pension, I don't feel comfortable selecting the 0% to spouse scenario and am somewhat hesitant to select the 50%. With taking the partial lump sums and delaying my SS, along with our 401ks and IRAs, I'd probably be ok, but I'm not sure enough to risk it. If I clear all other factors out of the situation, we could take the highest option with no payments to surviving spouse if we also held around $1M in term life on him. He would retire at 57 with the $1M policy and we could decrease the policy over time. Has anyone done something like this in order to hedge a pension for a spouse? Anyone who has term life in their 60s or early 70s care to give an approximate premium? If it matters, we are about the same age, I am about half a year younger and we are both healthy but a bit overweight but could work on that.
afan
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Re: Using term life to hedge a spouse's pension?

Post by afan »

This does not sound like a job for term life. As your partner ages it will become extremely expensive? Drop it at that point? Then you would be out both the cash you paid for the term and the death benefit. Still trying to make do without the pension.
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Zillions
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Re: Using term life to hedge a spouse's pension?

Post by Zillions »

Depending on his age & health, you may or may not even be able to get term life insurance at reasonable rates at age 57.

Instead, I suggest you call insurance companies & see if you can take out the longest term life policy NOW - when it might be cheaper, more affordable and possible, before he develops any health condition that makes it impossible to get insurance on him. Then you can convert it to a whole life policy if you should still feel the need for one when the term is about to expire
Mike Scott
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Re: Using term life to hedge a spouse's pension?

Post by Mike Scott »

If the pension is a large part of expected retirement income, I would only look at the 100% survivor option. You may be able to make a case for life insurance instead but check out the cost of insurance against any reduction in pension value.
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Stinky
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Re: Using term life to hedge a spouse's pension?

Post by Stinky »

Go to term4sale.com or Zander.com. Get quotes for 20 year or 30 year term for a male aged 57 to see what you’d have for a premium.
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Grt2bOutdoors
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Re: Using term life to hedge a spouse's pension?

Post by Grt2bOutdoors »

Take the 100% option - if you are dependent on the pension for income there is no reason to take any lump sum payout. The whole idea of a pension is to provide a stream of income for the remainder of your primary and surviving spouse lifetimes. If you want to find out the cost of life insurance, use term4sale.com and price out a standard policy, not super preferred. You are going to find the cost of insurance is going to chew up alot over the next 13 years. A preferred policy for a 57 year old male with $1 million in coverage for 15 years is about $3K. I don't know how you believe you can just adjust the policy coverages down as time goes by, these policies are for the base number, if you believe you can qualify for a new underwritten policy in different amounts I'd advise against it, things crop up as we age, you might lose weight but something else might show up and you might not qualify for any policy at all. The question, is wasting $45K on premium payments that could potentially grow to $90K or $180K over your retirement worth it in exchange for a partial lump sum and a lower monthly benefit?
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Dontridetheindexdown
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Re: Using term life to hedge a spouse's pension?

Post by Dontridetheindexdown »

100% to surviving spouse might just be the cheapest insurance you can buy.

How much does it really reduce your monthly income, compared with paying an insurance premium?

100% to surviving spouse was not available to us.

Instead, we purchased a single premium immediate annuity for my wife, to offset the pension decrease if she survives me.

Statistically, annuities return more to people who live longer, whereas life insurance returns more to survivors of people who die younger.
tj
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Re: Using term life to hedge a spouse's pension?

Post by tj »

Stinky wrote: Sun Apr 04, 2021 6:33 pm Go to term4sale.com or Zander.com. Get quotes for 20 year or 30 year term for a male aged 57 to see what you’d have for a premium.
Maybe look at the Standard risk class though, how many 57 years old would pass the Preferred Plus cut?
BruDude
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Re: Using term life to hedge a spouse's pension?

Post by BruDude »

This is a concept called pension maximization. Sometimes it works sometimes it doesn’t. Depends on the difference in payouts, the age and health of the insured, and how long you need the coverage.

The idea is that if the life insurance costs less than the difference in payouts, you can see a scenario where the life insurance makes more sense. If you have a permanent need, you could also look at the cost of a guaranteed universal life policy which is basically “term insurance for life” in a sense.
Carl53
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Re: Using term life to hedge a spouse's pension?

Post by Carl53 »

Been retired for a decade plus. At that time I only had a 0% or 50% survivor pension option for my several years younger spouse. Since I was also going with a levelized plan until age 62, the 50% survivor plan was actually about 2/3 of the post age 62 benefits (and less than 40% of pre age 62 ) for me. Using my personal retirement spreadsheet I noted that should I pass early, my spouse would have marginally adequate resources (compared to what they would have been had I still lived). I added a new $300k 15 year term life policy at 57 for about $850 a year (replacing one that was going to expire within a couple years) to at least cover any shortfall prior to being able to claim SS survivors benefits. I decided on a 15 year policy as it seemed to offer the best value and would allow alternatives such as delaying IRA withdrawals or conversions if the death benefit were received later in the period. Got it through Zander.
StillGoing
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Re: Using term life to hedge a spouse's pension?

Post by StillGoing »

We recently underwent a similar calculation since my pension (for which a 50% survivor rate was the only option) forms the bulk of our income until my spouse's state pension kicks in.

We ended up with a mix of fixed term and decreasing term life insurance (which has cheaper premiums than solely using level term, but has worse inflation-proofing) to cover the potential income gap - see.

viewtopic.php?f=2&t=344266

for a few more details

cheers
StillGoing
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