Life Insurance question

My wife will retire soon. She can take her pension in several ways depending on if the term is for her life only, her life with a minimum number of years, her life and then 50% to me as a survivor. or the
lowest amount for the time either of us is alive.
Is there a type of life insurance I can get to cover the difference? For example if the difference between what my wife would get for her life only and the amount we would get if either of us is alive is about $500/month. So is there a life insurance that would pay me $x/ month for the remainder of my life if she dies first? If the cost is less than $500/month it may be a better option.
If this type of insurance is available, what is this type of policy be called and are they commonly available.
thanks pdxor
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Yes, there is. My wife is in the same situation and we are investigating something called "Pension Alternative" from MetLife. They claim to have a patent on it, but I can only find one patent assigned to MetLife and that is on a different area.
Regardless, the idea is just as you suggest. You buy a life insurance policy on your wife. If she dies first, you convert the proceeds to an immediate annuity that continues the pension payment. They structure the whole thing so you get at least the pension amount. It will be more if she lives longer.
Obvious downsides are that, if you miss some insurance payments, and let the policy lapse, you are out of luck.
Also the pension payment is guaranteed by the Feds, the life insurance is guaranteed by the insurance company. If the company is strong, this is probably a small difference, but watching blue chip companies go down raises the issue. There are also state insurance guarantee funds, but they may be limited to smaller amounts than you need to make this work.
My wife and I are meeting with the planners in a couple of weeks, so lack all the details. I do not endorse this thing in any way, just answering your basic question and inviting comments from anyone you has any experience with it.
-- Doug
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Yes, sort of. BUT, as always, you need to be careful and make sure you understand all the variables.
I am not aware of a special type of insurance that covers this. Generally the theory is that you simply buy as much life insurance as you need to produce the lump sum necessary to fund a Single Premium Immediate Annuity sufficient to replace her income on her death. If we say that real fast it makes it sound simple, but here's what complicates the issue -
How much insurance you'll need will depend on how long she will live and how long you will live after she dies. This is the big question in all life insurance cases. If we knew she was going to outlive you then you don't insurance at all. If we assume she dies before signing her first pension check then you need a LOT more.
If you go www.immediateannuities.com you can plug in various info and it will solve for the result. For example, if we knew how old you are now, what state you lived in and how much her full pension was that web site will tell us how much we need to deposit to receive an income stream for a period of time.
Your next issue is going to be the type of insurance that you buy. Most people prefer term insurance because it is cheaper than permanent life. Just remember that cost is NOT the only difference here. Term insurance is just that - where the premium is set for a specified term. If you die within that term the insurance pays off. If you outlive the term then the premium will usually increase, usually by a significant amount. So you could lose the insurance if you can't afford it.
Term polices are also age driven, to some extent. By this I mean that with all other things being equal a younger person will pay less for the same policy as an older person. This is what drives the increases in term policies after the initial term. You also have to be aware that the older we get the harder it is to get the longer terms. I am aware of ONLY ONE insurance company that will issue a 30-year term policy to a 50-year old and I don't know any companies that will issue a 30-year term policy to anyone over 60. You can still buy term, just not with a guaranteed low premium for that long. Typically, seniors can get 15 or 20 year term policies and no one knows if ANY term is long enough.
For example, if your wife is retiring at 65 and the longest term you can get on her is for 15 years that means that the insurance will either lapse or increase when she hit 80. If her mother is alive and kicking and is now 90, then a 15 year term may not be sufficient. Typically, when the initial term expires the premium increases and the older you are the more it will increase. I have a client who at 36 bought a 15-year term policy for around $50 a month. When he hits 51 that premium will increase to about $250 a month. Further, he has developed some medical issues that will make it harder for him to get replacement insurance since he will likely NOT pass a physical.
Consider that for a 65 year old male in Maryland you'll need about $750K in a lump sum to provide $5K a month for life, with 20-years certain. This means that you'll need life insurance on your wife for about $750K. Premiums for a 15-year term policy for STANDARD NON TOBACCO (someone in good condition who doesn't smoke) female age 65 run from about $500 to $800 a month. When this policy term expires (when she is 80) the premium will increase to over $2,000 PER MONTH.
Now you may be able to tweak this some by assuming that in 15 years you won't need as much insurance on her. So I've checked for quotes on an 80-year old female, again standard nontobacco, and THAT premium is $2,334.28 and is only available for 10-years.
You could tweak it further if you needed less insurance - by assuming you'll also be 80 when she dies you would only need about $450K to buy a single premium immediate annuity that would guarantee $5K a month for the rest of your life, with NO period certain. So the insurance premium for a standard nonsmoking female aged 80 in Maryland would be around $1,500 a month - NOTE that this is still at least triple your projected savings.
Another option would be for you to buy permanent insurance - doing this would guarantee that the premium would NOT increase. BUT this will cost considerably more. A $750K permanent policy will cost about $2500 a MONTH this far exceeds the savings you're looking at and is why term insurance is so popular.
Keep in mind that there are lots of tweaks that can be made as long as you are willing and able to adjust your assumptions and needs. Assuming you'll need less than her full pension means you need a smaller lump sum to provide a reduced monthly payment. Assuming as you get older you'll need less in general means you can get by with less insurance because you'll need to buy a small SPIA.
Of course, one of the oddities I find in most of the planning literature is that one assumption is that you'll be able to live on less, yet we can expect considerably higher health care costs - these two issues seem to contradict each other. Unless you assume that you'll live on less because you'll spend more on health care - BUT that negates the assumption that you'll need less income.
As a side note, one of the benefits of working with a professional planner is that they can help you identify and quantify your need and they can help you explore your options. It can certainly be done on your own, you just have to make sure you don't miss anything, which is where most people fall short. Remember, no one plans to fail, they just fail to plan (sufficiently).
Good luck, Gene E. Utterback, EA, RFC, ABA
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Gene,
Thanks for some of your prices. That give me a general idea.
I knew I could just go buy regular life insurance and calculate it all myself, reducing the amount needed year by year while the cost increased year -by-year due to age. As you mentioned to do all this I would have to make all the assumptions on how long I was going to live, how long my wife would live etc. Heck if I knew all that I wouldn't need the insurance.
What I was looking for was something that did all that as part of the policy. I want THEM to figure the risk and cost of paying me $/month for the rest of MY life-whatever it may be- IF my wife dies before me-- Whenever that may be.
Someone has figured that already because the price difference is an option in her basic pension plan. The cost I would be paying for this if I bought it through the pension plan would be $500/month and it would be paid (withheld) every month that either me or my wife are alive because the plan would just pay us $500 less than if we did it only for her life.
If a pension plan can figure this and come up with a price, I thought a life insurance company should be able to figure it out. The basics of what I want to buy IS life insurance.
Thanks pdxor
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You are almost there. After calculating the single sum necessary for the annuity assuming you die soon (anything else could be an inadequate amount), get life insurance quotes that will guarantee that amount regardless of investment performance or date of your death.
Bear in mind that the pension survivor benefit guarantees both of those things, meaning that if the life insurance doesn't, you're comparing apples to oranges and taking risks with your survivor's future. Nothing inherently wrong with that, but you need to acknowledge it and in fairness explain it to your potential survivor.
The life insurance product that does that is called whole life insurance. So... get a quote on whole life in the amount necessary. When you compare that premium to the $500/month pension savings, you'll have your answer.
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Gene hints at what I would do -- buy a lifetime annuity for yourself to make up the other 50%. So your annuity plus her pension would amount to 150% of her pension while she lives and if either of you dies the income would be 100% of her pension to the survivor.
In my case, both my wife and I have pensions that give 100% to the survivor.
-- Ron
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