The Life Insurance Move That Lets a Retiring 64-Year-Old Take the Higher Single-Life Pension and Still Leave His Spouse $720,000 Protected

When Robert began preparing for retirement at age 64, he faced an important decision.

Like many retirees with traditional defined-benefit pensions, Robert was presented with two options. He could elect a single-life annuity, which would provide the highest possible monthly income but would end when he died. Or he could choose a joint-and-survivor annuity, which would continue paying a portion of the benefit to his wife if she outlived him.

At first glance, the joint-and-survivor option seemed like the obvious choice. But when Robert looked at the numbers, he realized the decision was more complicated.

His pension offered $4,800 per month under the single-life option. The 50% joint-and-survivor annuity, however, would reduce the monthly payment to $3,900. In effect, Robert would be giving up $900 every month for the rest of his life in exchange for survivor protection.

Thankfully, Robert was able to employ a pension maximization strategy that allowed him to take the higher single-life pension and still leave his wife with ample protection. 

Using multiple products for complete protection

What Robert opted to do was accept the higher single-life pension option but use the extra $900 per month he received to buy a life insurance policy on which his wife was named as the beneficiary. Robert discovered that he could purchase $720,000 worth of coverage with that money. 

If Robert dies first, his wife will receive the insurance benefit. Even though his pension will die with him, his wife will be protected. 

This option made sense for Robert because it doesn’t lock him into lower monthly payments under his pension. He can collect the larger amount but still provide financial protection for his wife.

Of course, one thing Robert has going for himself is good health. That’s how he was able to purchase affordable life insurance at an older age. For someone with poor health, obtaining affordable permanent life insurance could be much harder. So this strategy may not work for everyone. 

The timing matters, too

Most pension elections cannot be changed once benefits begin. This means that if you end up in a similar situation of having to choose between two pension options and you want to do something similar to what Robert did, it’s best to have your life insurance policy approved and in place before making your election. 

If you wait to buy life insurance until after making your pension election, you take the risk of not being able to qualify for insurance. If that happens, or if you only qualify for life insurance at a very high rate, you may have, by that point, lost the option to elect the joint-and-survivor annuity option. 

Married participants should also be aware of federal spousal protection rules. Under the Retirement Equity Act of 1984, many employer-sponsored pension plans automatically provide a qualified joint-and-survivor annuity for married workers. Electing a single-life annuity often requires the spouse’s written consent.

Of course, for the sake of a healthy marriage, it is important to discuss these strategies jointly as spouses. But in some cases, it’s possible to get the best of both worlds if you have a pension coming your way. If you do what Robert did, you can secure a higher monthly payment for yourself while ensuring that your spouse has financial protection in place.