Pension Policy Benefits

Pensions are structured a variety of ways. But payments from a pension plan are commonly annuity payments. Annuities from insurance companies provide the simplest method for a pension to make payments to participants. In fact, insurance companies are often the custodians for pension plans. You should understand how your pension policy benefits work, since it is likely based on these types of insurance policies.

Significance

An annuity policy is an insurance contract that promises a defined benefit payment. For pensions, this payment occurs monthly. Payments are made according to actuarial calculations of life expectancies of the plan participants. All payments are known in advance, and the benefit payments are guaranteed by the issuing insurance company.

Features

The pension plan offers several payment options. You may take the pension as a lifetime payment. This mirrors a lifetime annuity payment. Payments are made to you for your entire life. Payments stop when you die, but a beneficiary payment option may be available. This payment option allows you to receive lifetime payments from the pension plan at a reduced rate while leaving some money aside for your spouse. Your spouse receives either 50, 75 or 100 percent of your pension depending on the reduction you took during your lifetime. Finally, you may choose a lump sum payment option. This payment option allows you to receive the total value of your pension minus the interest that would be paid on the pension payments.

Benefit

The benefit of a pension annuity is that the payments are guaranteed by the insurer. You receive your check from the pension every month, so you don't need to worry about getting a regular paycheck to pay your normal bills and expenses. Your pension benefits are protected by the Pension Benefit Guaranty Association, while all of the money held with the insurance company is guaranteed by the insurance company and the guaranty association in your state.

Disadvantage

The disadvantage to annuity pension policies is that once you choose your pension payment arrangement, you cannot change the payment option. The payments also reflect a fixed interest payment. This means the interest paid on pension annuity payments is low, since the interest is derived from the insurance company's general account, which is invested in bonds and bond-like investments. These payments are supplemental to Social Security and your own personal savings. Thus, the pension payment alone may be insufficient to cover ordinary expenses.

References

• "Practicing Financial Planning for Professionals (Practitioners' Edition), 10th Edition"; Sid Mittra, Anandi P. Sahu, Robert A Crane; 2007
• "Actuarial Aspects Of Individual Life Insurance And Annuity Contracts"; Albert E. Easton, Timothy F. Harris; 1999
• "The Calculus Of Retirement Income"; Moshe A. Milevsky; Cambridge University Press; 2006