Q: Should I Buy Life Insurance Instead of Selecting The Survivorship Option On My Retirement Plan?
This approach is typically referred to as Pension Maximization. This is done many times 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 he/she is 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. The analysis really comes down to the numbers. If there is enough savings to replace the lost income after you buy the term insurance and invest the difference then the strategy works. There are times though because of insurance, based on health issues etc., or the rate of return of the investments that the math doesn’t come out and taking the survivorship option is the best.