The Answer

Some financial planners suggest that you take the full 100% benefit and buy life insurance so that the surviving spouse would receive a lump insurance sum to make up for the loss of monthly pension income. Be wary of insurance sales people who tell you this. It's often a good way to sell more insurance, but not the best use of your investment dollars.

Here's why: Unless the surviving spouse is a genius money manager who could invest the insurance settlement sufficiently well to support him- or herself, taking the full benefit and buying insurance is a bad choice. But, more importantly, this strategy needs to be implemented many years before retirement to be effective.

Dolan Smart Money Move: Unless your spouse is a very savvy investor who could make or exceed your lost monthly benefit by investing insurance proceeds, most couples are better off selecting the "less than 100%" benefit so that the surviving spouse would have a dependable and predictable source of income for his or her entire lifetime.

However, if you are an unmarried couple, the surviving partner will not be able to get tax-deferred treatment for the balance of the pension plan. In that case your best options are either term life insurance with your partner as beneficiary, or, if your employer's plan allows it, taking the distribution in the form of an annuity that covers both of you.

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