Term Life

yellowdog51March 22, 2010

I'm considering buying some term life - probably 20 year level term. Here's why:

My wife and I are fortunate to both have defined benefit pension plans (pays a fixed amount), and both are nearing retirement. My wife's retirement is coming up soon, so we're looking at retirement benefit options. To simplify, she can take a "full" benefit with no survivor's benefit to me if she dies first, or can take a "reduced" benefit that would pay a survivor's benefit to me.

I'm looking at term life policies with the thought that if the level premium is less than the benefit reduction that she would take to provide a survivor's benefit, we would be better off for her to take a full benefit and I would receive the life proceeds if she died, thus offsetting the loss of retirement income in that event.

We would similarly take a policy on me when I retire (for her income/asset protection).

Of course we realize that term life is an income/asset replacement only for the term of the policy, but I think that in 20 years I'll have a less active lifestyle anyway and could accept the loss of income if the life policy had lapsed at that point. And, of course, we would have enjoyed the full retirement benefit for that period.

I would appreciate any pros and cons, or any other thoughts or suggestions the folks on this forum may have.


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Your plan is perfectly reasonable, but it is also completely numbers driven. Have you gotten quotes on the term insurance? How do those compare to the benefit drop?

Presumably, your pension plan has an actuary crunching the numbers on the survivor benefit and has determined they can make a small profit by reducing the benefit x/month and offering the survival coverage. The average person is going to find that your plan is a wash or pretty close to it (since the actuary at the insurance company is running the same numbers). Of course, they are just playing the averages, so you are going to have to crunch the numbers with your specifics.

    Bookmark   March 22, 2010 at 4:44PM
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Are you taking into account and SS the two of you may receive? SS will probably increase over a long run unless a new system goes into effect. A thing to consider is what is the survivor amount. Is it 50%, 100% or some other amount? Since you state you are unlucky enough to have a flat pension amount the amount that is received will not go up. With inflation in 20 years the amount you both receive may not be enough to cover the one that lives the longest expenses.

In looking at term life you will need to do some investigation as some policies do not pay what is advertised. We keep getting term life advertisement's that are term life, travel accident plans. Fine if you plan on dying in a common carrier accident. Common carrier's are public transportation. If you sit down and figure the cost of the plan for the twenty years you are thinking about, you may find that by just putting the amount of the premiums in even a low rate investment can return more of your money than the policy.

Although I am a firm believer in term life where there are young children in the family for an older couple it is not often the better choice. Although the payout amount should be tax free to your beneficiary the survivor will have to stretch it out over the remaining lifetime. There is nothing written which one of you will go first so you would have to have a policy on both.

    Bookmark   March 23, 2010 at 12:45AM
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I suspect that the Joint and Surivor option on the retirement plan would be more cost effective. Here's the reason why.

When the pension benefit is reduced, it's a pure actuarial value. There are no loads or adjustments for profit. Life insurance policies always build in adjustments for profits and commissions.

Yes, I am a pension professional. I do this every day. And don't forget about the present value of benefits. 100 monthly payments of $1 is not equal to $100, but a much smaller amount.

I'm interested in what you find out.

    Bookmark   March 23, 2010 at 11:43AM
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To each of you - thanks for the thoughtful replies.

bill - Yes, you are exactly right, it's a numbers game. I have in fact looked at some premium numbers and so far it looks like we could come out $200 to $400/month ahead (comparing the benefit reduction and the term life premium to the maximum benefit). That adds up over time and leaves my wife in a better situation if I die first (which is actuarialy likely).

maifleur - Have not factored in SS yet because we're dealing with my wife's retirement first and she's not eligible for SS. We'll consider that when I retire since it will be a factor for me. Also, I'm aware of the AD&D-type plans, but thanks for the heads up. And I generally agree with you about who needs life insurance, but this is a retirement planning exercise. BTW, I didn't say "unlucky" - in fact, I feel very lucky to have a defined benefit plan.

clg - I think you are generally right, but in this case we would be buying 20 years worth of "protection" whereas an actuary has to figure on paying the survivor benefit based on a term-of-life estimate. So, yes, we would be taking a known gamble (no benefit after 20 years), but that's part of the calculation (and takes into account other financial considerations).

Again, thanks for your thoughts. I'd still like to hear any other thoughts if anyone's reading.

    Bookmark   March 24, 2010 at 1:24PM
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It seems as though you are little reluctant to put the actual numbers out on the internet for the world to see. From the benefit difference, I suspect you are talking about a fairly large amount of money. You should consider consulting an estate planner to double-check your calculations. You seem to have thought this through and have considered the risks, so I'm not sure how much help "general" advice is going to be.

Also, it is entirely possible that the best thing for you is neither of the options you mentioned. Insurance is designed to minimize your financial risks, but that comes at a price. If you each have a pension and SS already as well as other assets and investments, you aren't necessarily at much risk. You may be better off taking the single benefits, skipping the insurance, and stockpiling cash.

    Bookmark   March 24, 2010 at 3:05PM
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