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Should I Buy Life Insurance Instead of Selecting the Survivorship Option on My Retirement Plan?

2012 November 6

This approach is typically referred to as pension maximization. This is often done by people who do not want to have the reduction in their monthly benefit that occurs if they select a survivorship benefit or they do not have survivorship benefits as part of their pension. By purchasing a life insurance policy, the beneficiary receives the death benefit instead of a continued monthly income, which allows the primary retiree to receive the higher income as long as they are alive. This approach works quite well as long as you can qualify for a term life policy based on your health and you use the savings generated by not buying a cash value plan to create a savings account in the event that you outlive the term policy.

The primary purpose of the plan is to buy term and invest the difference to create a fund that will replace the life policy when it expires. You really don’t need an amount longer than 20 years since the growth of your savings plan will offset the need for life insurance into the future. You just need to make sure the amount of coverage you initially purchase is enough to generate the lost income you will not receive from the pension if you were to die.  If you have enough savings to replace the lost income after you buy the term insurance and invest the difference, then the strategy works. There are times, however, when the math doesn’t come out and taking the survivorship option is the best (usually due to health issues or other factors that may drive up the cost of insurance).

Working on creating a policy that works for you? Check out 5 Term Life Insurance Mistakes to Avoid.