Joint and Survivor Pension Benefit or Insure Yourself?

If you are married and have a monthly pension, the recommendation is almost always to take the Joint & Survivor pension benefit option.  This means that while both you and your spouse are living, you will draw a slightly reduced pension compared to a Single Life Annuity. The benefit is that if the pensioner dies first, the spouse will still receive a benefit for his life.  This remaining benefit of course would be reduced. I got a great question from a client recently. “Should we take the 65% Joint & Survivor pension benefit, or take the higher Single Life Annuity and insure ourselves in the case that the main pensioner dies first?”  This post compares insuring yourself, or using the joint and survivor benefit to insure if the pensioner dies first.

First, let’s compare some common pension options for married individuals:  

Single Life Annuity:  The participant gets the highest monthly pension, but his spouse receives nothing if he were to die first.  

65%/75%/100% Joint and Survivor (J&S) Benefit:  This is the standard pension option for married couples.  This pension gives you a reduced monthly distribution when you both are alive compared to the Single Life Annuity, but the remaining spouse gets a benefit when the pensioner dies.  The remaining benefit is based on a certain percentage typically between 50% to 100%. The percentage represents the amount that the surviving spouse would receive. The higher percentage, the lower amount that you will receive while you both are living.  For example, if you choose the 75% J&S benefit for $1,000 per month, the surviving spouse would only receive $750 per month if the main pensioner dies first.

5, 10, or 20-year certain:  If the main pensioner dies within the stated 5, 10, or 20 years, the remaining spouse would receive a benefit until the term is up. For example, let’s say the pensioner selects a 10-year certain policy and dies 4 years after starting the pension, the surviving spouse would continue to receive the pension for another 6 years, until the 10 year term is up.  After the term has finished, the pension would stop.

The scenario

The client and his wife are both 60 and she has a monthly pension worth $1,200 if she selects the Single Life annuity and $1,050 if she selects the 65% J&S pension benefit. Essentially, she is paying $150 per month of “insurance” to make sure her husband receives 65% if she were to die before him. They found a 20-year, $100,000 term life insurance policy, which would cost them $800 per year, or $67 per month.  

The question is, “Should we take the 65% J&S benefit and pay $150 per month in insurance or take the higher Single Life annuity and buy a $100,000 term life insurance policy for $67 per month?” Now, if we knew how long each person would live, this would be easy.  However we do not, so let’s look at some different life expectancy examples to see which strategy works best. In the case that the main pensioner dies first, and within 20 years while the life insurance policy is in place, the total benefit includes the $100,000 life insurance benefit.  Age 81 is important because it is the year after the life insurance policy lapses. When both spouses die in the same year, no life insurance policy is added to the total.

Pensioner Dies Spouse Dies Total 65% J&S Benefit Total Single Life + Insurance Benefit
70 70 $138,600 $149,556
70 80 $220,500 $249,556
70 90 $302,400 $249,556
81 70 $277,200 $299,112
81 81 $277,200 $299,112
81 90 $350,910 $299,112
90 70 $390,600 $421,476
90 80 $390,600 $421,476
90 90 $390,600 $421,476
  • In every instance where the main pensioner lived longer, taking the Single Life Annuity and buying the insurance was the better option.  Of course, the reason for the 65% Joint & Survivor benefit is to help insure if the spouse lives longer.
  • In this scenario, the only case in which the 65% J&S benefit is better is if the main pensioner dies fairly young, and the remaining spouse has a long life.
  • One thing to remember is that the life insurance proceeds are tax free, compared to paying taxes on the pension payments. Another reason that the life insurance policy is more advantageous.

Now, in this scenario the pensioner was able to get insured fairly cheaply, she has a pretty clean health history, and the 65% J&S Benefit is quite a bit lower than the Single Life Annuity. She has over a 12% reduction in her annuity by taking the 65% J&S Benefit. This is very high, and with many companies it may be only a 5% hit or less. Also, if your health history hasn’t been solid, you may need to pay much more than just the $800 per year that she has to pay. Every situation is different, but which pension you take is a huge decision. It makes sense to take some time and do the analysis to see if you are better insuring yourself, or insuring yourself through a J&S benefit. 

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