1. Potential for Higher Pension Payments
- Increased Monthly Income: By opting out of survivor benefits, you can receive higher monthly pension payments during your lifetime. This can provide more financial flexibility and higher income in retirement.
2. Life Insurance Flexibility
- Customizable Coverage: Life insurance allows you to choose the coverage that fits your needs, ensuring your spouse or beneficiaries receive a specified sum upon your death. This can be tailored to your financial situation and goals.
- Beneficiary Control: Life insurance policies give you control over who receives the death benefit, which can be advantageous if you want to provide for multiple beneficiaries or if your spouse is not your primary concern.
3. Wealth Transfer and Tax Advantages
- Tax-Free Death Benefit: Life insurance proceeds are generally tax-free to beneficiaries, which can be a significant advantage in estate planning and wealth transfer.
- Estate Planning Tool: Life insurance can equalize inheritance among heirs, cover estate taxes, or provide liquidity for estate settlement.
4. Policy Ownership Flexibility
- Ownership Options: A trust or other entity can own life insurance policies, offering additional control over how and when beneficiaries receive the funds.
Cons of Not Taking Survivor Benefits and Buying Life Insurance
1. Risk of Policy Lapse
- Premium Payments: Life insurance requires ongoing premium payments. If the policy lapses due to non-payment, your spouse or beneficiaries will not receive the death benefit, leaving them unprotected.
- Cost Considerations: Life insurance premiums can be expensive, especially if purchased later in life or if there are health issues. The cost might outweigh the benefits, particularly compared to the guaranteed nature of pension survivor benefits.
2. Health-Based Underwriting
- Health Impacts Cost and Eligibility: The cost of life insurance is primarily determined by your age and health at the time of purchase. If you have significant health issues, the cost may be prohibitive, or you may not qualify for coverage.
3. Uncertainty of Investment Returns
- Variable Outcomes: Unlike a pension, which provides a guaranteed income for life, life insurance depends on the policyholder’s ability to pay premiums and the insurance company’s solvency. Additionally, there may be no cash value accumulation if the policy is not a whole or universal life policy.
4. Longevity Risk for Spouse
- Risk of Outliving the Benefits: The death benefit is only paid once with life insurance. If your spouse outlives the benefit, they may face financial insecurity. In contrast, survivor benefits from a pension can provide lifelong income to the surviving spouse.
Considerations
- Financial Stability: Assess whether you can afford life insurance premiums throughout your life, even into retirement, without jeopardizing your financial stability.
- Spouse’s Financial Needs: Consider your spouse’s financial needs and whether life insurance can adequately replace the security provided by survivor benefits.
- Risk Tolerance: Evaluate your comfort level with the risks associated with life insurance versus the guaranteed nature of pension survivor benefits.
Conclusion
Opting out of survivor benefits to purchase life insurance can offer greater flexibility and potential financial benefits. Still, it also comes with significant risks, especially in costs and the potential for policy lapse. The decision should be based on carefully analyzing your financial situation, health, and retirement goals. Consulting with a financial advisor can help you make the best choice for your circumstances.
