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Survivor Annuity vs. Life Insurance: Which is Best for You?

Life InsuranceIn many divorce cases, the most valuable asset to be divided is a pension. Pensions, or “defined benefit plans,” pay retirees a specified recurring benefit upon retirement that the retiree receives for life. Examples of defined benefit plans are the Federal Employees Retirement System (FERS), Virginia Retirement System (VRS), and military retirement benefits. Two main characteristics of pensions make them so valuable: first, the payments received can add up to hundreds of thousands of dollars throughout the life of the retiree; and second, the pension pays its benefits in regular (usually monthly) intervals, creating a guaranteed stream of income for the recipient.

Another feature of defined benefit plans is that they only provide the benefit to the retiree—when the retiree passes away, all benefits cease. This is generally of no concern to a retiree in a divorce proceeding. But a former spouse could outlive the retiree by years, even decades, and lose out on their share of income from the retiree’s pension if it is not adequately protected.

There are two general methods to protect a former spouse’s interest in a pension plan. The first is to obtain private life insurance coverage on the retiree. This can be through whole life, term life, or any other form of life insurance policy. It is usually purchased by the former spouse with the cooperation of the retiree. The other option, if available through the pension plan, is a survivor annuity. This option is usually funded by reducing the monthly benefit received from the pension to provide the former spouse with continued regular payments should the retiree predecease them.

As with most decisions in divorce cases, there are pros and cons to each approach. Private life insurance, in general, offers more flexibility in coverage, as the former spouse can choose the length of the policy and the amount payable as a benefit. This also leads to a lower cost for coverage. If the former spouse only outlives the retiree by a short period of time, however, the benefit derived from a lump sum payment from the life insurance policy may not prove to be worth the cost. There are also an abundance of life insurance policy options, which can become a quagmire for individuals to navigate to best protect their interests.

Survivor annuities typically provide a monthly payment, as compared to the lump sum usually paid out by life insurance. These annuities provide a high degree of security as they are backed by the pension plan itself. The former spouse would receive a regular (usually monthly) annuity payment should they outlive the retiree, and will get that benefit for as long as they live. The costs are typically higher than private life insurance. The options for survivor annuities are usually more limited as well, with most plans offering only a couple of different coverage levels.

General factors to consider when deciding between life insurance and a survivor annuity are: the age difference between the parties; the gender differences (as gender affects life expectancy); and the health and medical history of the parties, including family history. Each party’s expected sources of income should also be considered. Securing the asset because it is needed to make ends meet may require a different type of protection than securing the asset because you want to pass the asset to your children or heirs.

Another big issue to consider when deciding how to protect a pension benefit are health insurance benefits. Access to continued health insurance coverage may hinge on the election of a survivor annuity. Even if the parties might otherwise favor life insurance over a survivor annuity, access to health insurance coverage may tip the balance in favor of a survivor annuity.

The choice between life insurance and survivor annuity is only really available to parties who are working to reach a separation agreement. In litigated divorce cases, Virginia courts only have the authority to award a former spouse an interest in a survivor annuity. Courts cannot order parties to obtain private life insurance to protect the former spouse’s pension interest. This fact can be used by either party as leverage in settlement negotiations. A retiree, for example, may agree to pay for a private life insurance policy if the alternative is a more expensive survivor annuity.

If you are facing a divorce involving a pension, be sure to consult with an experienced family law attorney. The divorce lawyers at Livesay & Myers, P.C. have years of experience in equitable distribution cases involving pensions, life insurance and survivor annuities. Contact us to schedule a consultation today.