Planning for retirement can force a person to make some difficult decisions.
This is especially true for some married people. After all, a husband and wife must make their retirement money last for as long as they both live.
Therefore, many companies offer their married workers an option: They can can get a full pension for life, or they can opt for a lesser survivor's benefit.
A survivor's benefit means that, after you die, your spouse would continue to receive part of your pension. But if you waive that option (which your spouse must agree to in writing), your surviving spouse gets nothing.
Deciding which option is better can be difficult, and both have somedefinite benefits.
By taking the single-life payout, you would get a larger pension check each month. And by taking the survivor's plan, your spouse would get a lifetime income.
But there is a third option that many workers never consider. It involves buying life insurance to supplement your pension.
Here's how it works:
Suppose you chose the higher-paying plan, which would end at your death. You could still protect your spouse by taking out a life insurance policy on yourself.
That way, if you die first, your spouse could invest the insurance proceeds and live off the income.
But for this strategy to work, the insurance policy must be large enough to generate sufficient cash flow.
Though some workers could benefit from this strategy, relatively few
elect to go this route, said Bruce Zimmerman, a vice president at Miller Mason & Dickenson, a benefits consulting firm in Conshohocken, Pa.
"Most workers don't want to deal with the additional insurance and the insurance agents," he said. "And many aren't able to do the financial analysis to see which option is better."
In most cases, when a worker opts for the survivor's benefit, his or her pension payments are reduced by 20 percent to 25 percent, Mr. Zimmerman said.
The life-insurance option works best when there is a significant penalty for choosing the survivor's plan.
In fact, experts say, the amount of the pension differential should be larger than the premiums needed to fund the insurance policy.
In addition, it's important to buy insurance before you reach retirement age. That's because insurance premiums rise rapidly as people get older.
Taxes also must be considered. For example: After income taxes are factored out, the pension differential may be smaller than it initially seemed.
And when you compare the three options, you should consider (( the time value of money. In other words, a person should compare the value of a dollar spent today (on insurance) against the value of a dollar earned tomorrow (in a pension payment).
Because of these complicated analyses, many people never consider the life-insurance option, Mr. Zimmerman said.
However, here are some general guidelines:
* The survivor's option should be considered if you are much older than your spouse.
* The single-life plan may be best if your spouse is considerably older or in poor health.
* If the retiree is a healthy woman, statistics say she will outlive her husband. Therefore, the single-life plan may be best.
* Many pension plans have cost-of-living adjustments, increasing their value with inflation. The life-insurance option would not give you this benefit.
* If you opt for the life insurance policy, be sure you can afford to continue making premium payments. Otherwise, the surviving spouse could be left with little or no retirement income.
* Beware of insurance agents who promise huge returns on your cash-value policy. If performance does not measure up, your spouse may not end up with enough money to live on.
* Once a death benefit is paid to your surviving spouse, the money must be invested properly. Otherwise, it may not generate enough income, or your spouse could lose everything if the money were invested poorly.
* If you buy a life insurance policy on yourself and your spouse dies first, you could stop funding the insurance and collect the cash value. Or you could continue making payments and name your children as beneficiaries.