Pension and life insurance question

[Laura Ingalls]

I have a situation that I am not exactly sure how to handle or think about.

Background:
DH and I are both 50 yo. Both semi-retired and parents to two teenagers (presently 17 and almost 14). Neither of us presently have any life insurance. I have tended to think of us as self insured since if either of us kicked off the social security Survivor benefits would be more than we spend presently. We presently have ~25x expenses plus a small amount of 529 money.
Older child seems pretty set on a building trades apprenticeship and I suspect transition to adulthood that is not taxing to parental financial resources. Younger child would more likely take a more traditional college route.


Earlier this week I got a yearly pension statement via snail mail. I was reading the statement and it said something to the effect that Inactive members (me ) should consider taking their pension at the earliest opportunity regardless as to their employment status because if you die before you begin receiving a retirement benefit you forfeit matching employer contributions ie half the cash balance.

Anyway if I kick off in the next 5 years it’s a pretty big loss to DH. Basically he would get one year of expenses instead of an inflation adjusted amount a equal to 15% of current monthly expenses for the rest of his life (using a SWR of 4% it would take over four years worth of expenses to generate the same cash flow. And I basically have this problem times two as I have another slightly smaller pension with that the same issue.

Would it be sensible to have term life insurance on me until I do start collecting and elect some variation of survivor benefits? If I would die it sort of seems like I turned 330k into 80k in one fell swoop. DH isn’t going to be eating Alpo without this money but some term life insurance for a few years would fix this problem.

Any thoughts or advice?

[Fish]

For me, insurance is primarily a tool to hedge against unacceptable outcomes, but in your case, it could be reasonable to buy a few years of term life insurance to reduce volatility in your family’s financial situation wrt the unknown of surviving to collect your pension. I would also recommend doing the math on whether it would make sense to purchase term life until you reach the age at which you are entitled to full pension benefits, as there could be a substantial “early retirement” penalty for collecting benefits at the minimum eligible age.

[IlliniDave]

I would get $250K in term insurance ($330K-$80K), should be pretty cheap, and think about dropping it at the later of when you start the pension or your youngest child is fully fledged.

And like Fish said, check out the terms of the early pension. Mine is set up so I'll get the same total money irrespective of what age I start it, between when I start and age 78 (my actuarial life expectancy). If I live longer waiting is better, if I live shorter early is better. I suspect most are set up similarly, but possibly not all.

[Sclass]

I think this depends on a few variables. How much does the insurance cost? And, what kind of return can you reliably make on your own?

We can look at the extreme of cheap insurance and poor investment abilities and the choice is pretty obvious. Or you are a master investor and your insurance payment will take a dent out of your returns. You’re probably somewhere in between and I think you can calculate your break even points...or at least guesstimate them.

At the end of the day you’re entering a bet with the insurers. They’ll invest your money, or you can. They’ll take your money or you’ll take theirs. I guess one argument against self insuring is you can distribute your risk of failure over a bunch of other parties. I guess failure would be messing up the investment instead of dying.

If your dead your family may not need as much money.

I had a similar decision to make during a lay-off. I just converted my 401k and pension into an IRA and managed it myself. YMMV. I just punched it out. I’ve done 8% on that account over 14 years. Not great but my old employer is on the slow train to bankruptcy. I don’t think they’ll be around when I’m 65.

[Laura Ingalls]

@ everyone that responded both pensions give haircuts for taking benefits earlier. One is real straightforward the other not so much. It has two formulas and you get the highest of the two. The one formula is static and lists $348 per month at 55 and $559 @65. The other formula is based on the actual returns of the underling investments it lists $436 @ 55 and $524 @ 65. Unless we have catastrophic losses going for I will collect at any age under the market based system. It is the best run and funded state public employee system. The other one is less well funded but has tried to fix its problems by higher contributions from the state and the employee right now.

I priced 100K of term. It was about $200 per year. The select quote employee would not write it for more because it supposed to be below a multiple of my current income. I should have given a number that was average for all of our semi retired years not my monthly take from the 40 hours a month I am engaged in paid employment

I do get comfort from the idea of having less investments to deal with. I am an old school low cost three fund kinda gal. DH likes individual stocks and trades options. He is generally not much of a gambler but loves following stocks. I think his way is fine but definitely less dementia proof.

My family will need less if I die cause I eat a lot. But I am also the Chief Deal Finder, car insurance requoter, and light switch shutter offer.

[jennypenny]

I have a Banner life insurance policy (through lgamerica). They weren't the cheapest but they were the best combination of reputation and flexibility in underwriting (for me). They might be able to write something specific for your situation.

[Jason]

My family will need less if I die cause I eat a lot.

I'm not an expert in the field but I think the whole idea behind life insurance is the understanding that there is no "if" in the matter.

Personally, I have carried a million dollars policy since I've been married. And it has worked out well in terms of what future replacement cost will be when it expires. I think the "comfort" is in knowing your loved ones will have enough to pay the utility bills when you are not around to turn off light switches. I can play it close if I'm left to myself, but not when thinking it might not work out that way.

[Sclass]

I priced 100K of term. It was about $200 per year.

That sounds like a small price to pay to simplify life a bit. For less than $20 a month you take the guesswork out of estimating your likelihood of dying versus your ability to self insure.

[Laura Ingalls]

I also think I like the idea of buying amount to cover a portion of the difference. Cut the difference between going bare and attempting to insure for the whole amount. It’s not an all or nothing situation.

[DutchGirl]

I like this solution too.

$100k life insurance - meaning your DH can withdraw $4000/year rather safely for the next decades from it.

So instead of a roughly $12k/year benefit if the two of you were alive and you were collecting both pensions, at least he'll have roughly $4k/year to spend. And of course the expenses of a single person generally are lower than the expenses of a couple, although in general not twice as low.

[Jason]

100K of life insurance is worth more than 100K of pension because it is not subject to income tax

[Laura Ingalls]

I got another (lower) quote. They were happy to write 250k, 150k, and 100k. They didn’t give me the hard time about income that they I had with the other quote. I was I make x, DH makes y, and we have z in dividends/capital gains. Not sure If that was a result of my more confident delivery or if this person just knew what capital gains are .

They won’t write it until after I have my colonoscopy. DH and I had a fairly lengthy conversation about it with DH and neither of us are exactly sure which dollar amount is the most prudent but it probably doesn’t merit too much over thinking.