Should I pay for a pension guarantee in case I die early?

Should I pay for a pension guarantee?

By Tom Feigs on March 10, 2017
Estimated reading time: 3 minutes

Ed wants to know whether he should pay now so his spouse never has to worry about retirement income

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Q: I will turn 65 in February and would like to begin drawing my DB pension shortly thereafter. The latest calculation indicated an approximate (before tax) payment of $1,500.00 a month for life. The ‘for life’ part is where I have a problem. It bothers me to know that if I was to leave the gene pool while there was still a balance in my pension account, none of the remaining funds would be paid to my estate. There is the option of taking a 10 0r 15 year guarantee, but at $100 a month this seems expensive. Any suggestions? —Ed A: Defined benefit (DB) pension plans can provide you with a smooth transition into a comfortable retirement lifestyle or play a healthy part in your overall retirement resources. You will be faced with a few decisions as retirement nears, one of which is a guarantee period. You will have the option to choose a minimum guaranteed number of pension payments. The selected guarantee would be a cost that reduces your monthly pension amount. The guarantee period is fixed to the day you start your pension—not to the day you die. If you outlive the guarantee period, nothing goes to your beneficiary.

Guarantee Period	Description	Notes
No guarantee	Pension payments stop upon death	No cost
5 years (60 payments)	Assurance the pension will pay out for five years to you or, should you die, continues to your beneficiary	In a Joint Life situation, the guarantee period applies to the last to die.
10 years (120 payments)	Assurance the pension will pay out for 10 years to you or, should you die, continues to your beneficiary
15 years (180 payments)	Assurance the pension will pay out for 15 years to you or, should you die, continues to your beneficiary.

The life expectancy of a Canadian woman, sourced from Stats Canada, at age 65 is 21.3 years. A 65-year-old male can expect to live 18.1 more years on average. Both life expectancies are beyond the guarantee periods offered so there needs to be clear reasoning to ignore these statistics. It may be bothersome to slowly draw on your entitlement but you’ll be singing the praises if you manage to reach your 90^th birthday! A pension for life is a great match to the possibility of living a long life. Factors that influence your decision:

Purchase a guarantee period if ...	DO NOT purchase a guarantee period if ...
You have reason to expect a much shorter life span.	You have normal expectations about life span.
Your pension is the primary source of your income and you want to potentially leave something to your beneficiary.	You don't want to pay a premium that is statistically likely to have no benefit to anyone.
You lead a less than healthy lifestyle.	Lead a normal to healthy lifestyle
Your pension is more than you need so you won't miss the subtracted amount.	Your pension is an effective part of your retirement resources. You assume control over what goes to your beneficiary/estate.
You are single and have dependant(s).	Your spouse is the beneficiary (Joint Life).
You want to ensure a minimum amount is extracted from the pension plan, no matter what.	You are happy to pocket the extra amount every month while living—thank you very much.
You want a specific person to receive your pension should you die early.	Your will is set up to effectively divide your estate without depending on the pension.

Ask a Retirement Expert: Leave your question for Tom Feigs »Pension decisions are personal choices. Be true to your wishes and be at peace with your new lifestyle! Tom Feigs is a fee-for-service financial planner, money coach and retirement planning expert based in Calgary, Alberta.

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Comments Cancel reply

Stefan Forrestal says:

March 14, 2023 at 11:46 pm

Hello Tom,

I wonder if some pensions plans passively discourage members from selecting a straight life, no guarantee period pension.

When I started the online application process, there were only options presented for 5,10, and 15-year periods.

I called the Pension office and remarked on this. The explanation was “there’s not enough room to show the no-guarantee option” —I had to bite my tongue.

Then I was told it would take 3 to 4 weeks for them to email me the no-guarantee application. A disclaimer was read to me about how the pension would die when I did (words to that effect).

What a runaround!

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