Should I take a pension survivor option or buy life insurance instead?
By Seth Deal, CPA/PFS ·
The survivor option is usually the simpler way to protect a spouse. Life insurance can come out ahead, but only when the policy is big enough to replace the pension for life, you can qualify for it at a reasonable price, and it stays in force as long as you live. The idea, sometimes called pension maximization, is to take the larger single-life pension and use part of the difference to pay for a policy.
What the survivor option gives your spouse
With a Washington DRS pension, a survivor option keeps a monthly check coming to your spouse for the rest of their life, at 100%, two-thirds or half of your amount. A Plan 2 pension also gets a cost-of-living adjustment each July, tied to Seattle-area inflation and capped at 3%.
And if your spouse dies first, DRS will change your benefit to the unreduced single-life amount. So the survivor option doesn’t keep costing you if things go the other way.
What life insurance has to do instead
The policy has to replace a lifetime, inflation-adjusted income with a single lump sum. Your spouse then has to invest it and draw it down carefully, possibly for decades.
Term insurance ends after a set number of years. If you outlive the term, your spouse has no pension and no policy. Permanent insurance avoids that, but it costs more.
You also have to qualify. Your health at retirement sets the price, and some people can’t get coverage at a cost that makes the math work. Then the premiums have to be paid every year, on time, for as long as the policy needs to last.
Where insurance can make sense
There are real advantages. Life insurance death benefits are generally not taxable income to the beneficiary. A policy can also go to someone other than your spouse, like children. And if your spouse dies first, you can stop paying for the policy.
It tends to work best for someone in good health who can get affordable permanent coverage, or for a couple where the spouse has strong income of their own.
Questions to ask before you choose
How big does the policy need to be to replace the survivor benefit for life, including inflation?
What happens if I outlive the policy, or can’t keep up the premiums?
How is the person recommending it paid? Insurance is usually sold on commission, so it’s fair to ask.
One more rule: if you’re married and choose single life, DRS requires your spouse’s notarized consent with your retirement application. And the choice becomes final once retirement begins, with only a few exceptions.
How I look at it
I’m a CPA and fee-only fiduciary. I don’t sell insurance, and I don’t earn commissions on anything I recommend. In a plan, I model the survivor options next to a life insurance approach, so you can see both side by side before you elect.
A One-Time Plan starts at $3,000. The first step is a free 45-minute Retirement Clarity Assessment on Zoom, and it’s easiest when you and your spouse can both join.