Surviving Survivor Benefits

Editor’s note: This is the second of two articles on survivor benefits. This article looks at the rules governing pensions and annuities. The first part, which focused on Social Security, can be found here.

When we last saw Marie, who was widowed in 2023, she had sorted out her Social Security survivor benefits, a process that took nearly two years. That was an ordeal unto itself, as she explained. And, unfortunately, there is more to her story.

It starts with her husband's decision, decades ago, to collect his pension as a lump sum rather than as monthly payments over time, and ends with a plot twist involving a tiny typo that nearly cost Marie her health insurance. Marie agreed to share her story with Next Avenue readers as long we used only her middle name, to protect her privacy.

"Unfortunately, what Marie went through as a widow is all too common," says Mari Adam, a financial planner in Boca Raton, Florida. "If there's one thing I recommend to couples who are trying to prevent these roadblocks for their surviving spouse, it is to do a dress rehearsal while both parties are still alive and well.

"Survivor benefits are complicated — whether it's from a pension, annuity, Social Security or inheriting retirement account funds," Adam adds. "It's easy to miss things. That's why it's important to go through your legal documents together, check beneficiaries, titles, terms and passwords, so that you're on the same page."

The other reason to do a benefits run-through, as Adam suggests, is that the laws governing certain types of accounts and benefits can vary by state. Private pensions are generally covered by federal law, through ERISA (the Employee Retirement Income Security Act); but pensions from state and local governments fall under state rules. Annuities, being a type of insurance contract, are generally subject to state insurance laws. This can compound the confusion around sorting out the terms around different types of benefits — and provides another reason to start sooner rather than later.

First, the good news. Private and government pensions are required by law to offer benefits to a surviving spouse.

In the case of a private pension, the survivor benefit is generally half the amount of the employee's full pension (the rules are similar for government pensions). A surviving spouse is likely to see continued payments for their entire lifetime.

But it's possible for a married couple to waive the right to a survivor payout, with the written and notarized consent of both spouses, which is what happened to Marie.

Many years ago, Marie's husband decided to take his pension as a lump sum when he retired, rather than as monthly annuity payments. However, this eliminated any survivor benefit for Marie. "At the time, I was OK with that," she recalls. By taking his pension as a lump sum, they could invest it as they wished.

But, as Marie notes now, her husband lived far longer than the value of the lump sum amount, and would have likely received more money if he had chosen to get monthly payments. In that case, Marie would have continued to receive steady income payments for the rest of her life, as well.

If you or your spouse have a pension, your best move right now is to call the provider and find out what your options are, if any. "Sometimes the terms are set in stone, but it varies depending on the company," says Adam.

Retirement is full of pivotal choices like this: You make a sensible decision at one point, but it turns out not to have been the best choice down the road. Should you claim Social Security at age 62 or later? What's the right way to set up your pension or an annuity with a surviving spouse in mind?

All you can do is think through the assets and options in front of you and carefully weigh your choices. Most important, says Adam, both spouses should be involved at every step, especially women. "Because couples share so many assets, you may think you're entitled to X, Y or Z if your spouse dies, but you need to double check," she advises.

Marie's experience points to a key pitfall with pension plans that all spouses need to understand:

One spouse can sign a waiver opting out of survivor benefits when the pension holder dies. It's not easy to do. A notarized spousal signature is required by law in these cases. But it happens.

Why would anyone sign away pension survivor benefits anyway? Here are a couple of reasons:

• You want more money during retirement. By giving up the survivor portion of the pension, the monthly payments would be larger in retirement. After the employee's death, though, the surviving spouse would not get any further pension income.

• You don't need survivor benefits. If you know that the surviving spouse will be covered in other ways when the pension holder dies, it can make sense to surrender the survivor benefit for a higher payout during retirement.

Unfortunately, some pension recipients use fraud or manipulation to trick their spouse into signing away their survivor benefits. According to the Pension Rights Center: "There have been cases in which a spouse has signed a form waiving the survivor benefit by accident or without fully understanding what the form meant."

Annuities, like pensions, require that a beneficiary be named in the original contract — and there are a number of options for how the survivor benefits can pay out. Again, given the patchwork of rules governing these products, it's best to check the fine print.

The annuitant — that's the policyholder — must make sure the annuity policy includes a death benefit (not all annuities do). They can require that payments will go to the surviving spouse at the same rate after their death, or at a fixed percentage, or for a set number of years. A 50% joint and survivor annuity, for example, would pay the surviving spouse 50% of the original annuity amount after the policyholder's death.

The annuitant can also arrange for their survivor to receive a single cash refund, called a guaranteed minimum death benefit, if the policyholder dies before the full value has paid out.

The critical issue — and the underlying theme regarding survivor benefits — is that for the most part these decisions must be made while the policyholder is still alive, Adam notes. Often, the terms must be set when the account or contract is first established. And if that's the case, the spouse who holds the account or policy may not remember the original provisions.

Adam advises spouses to keep a written record, a cheat sheet, that doesn't require re-reading old contracts, or logging onto accounts and digging up terms and conditions. "Just keep a little notebook," she says. "That can help you track names, phone numbers and details — for example, if a company is acquired and the contact person has changed."

Another key point for your Surviving Survivor Benefits strategy: It's important to know in advance which assets you would inherit as a surviving spouse (for example, a home, car or other property). This is easier said than done, given that the laws governing estates and inheritance vary from state to state. Only in about one-third of states does a surviving widow or widower automatically inherit assets owned by their spouse.

One rule of thumb to bear in mind is that the named beneficiary on certain accounts or assets can take precedence over state laws — or even the will of the deceased. For example, if one spouse dies and leaves their IRA to their widow in their will, whether she actually gets those funds will hinge on whether she's named as the beneficiary on the IRA account.

Likewise, you may assume you're the joint owner of your home or car, but if your name isn't on the title, you may not inherit the property.

On top of the Social Security quandary described in a previous article, Marie also found herself fighting for her health insurance, which she had received via her husband's pension plan. She had always had trouble accessing her account, though it was never clear why. As long as her husband was alive, they could find his policy, and by extension find hers.

The situation became nightmarish once her husband died. Now, the insurance agents started to question whether Marie was covered at all, and she began to panic: Had something gone wrong? Was her policy canceled, now that her husband was gone?

Finally, after months of back and forth — scrutinizing her account, her login, her email address — they found the problem: A single missing letter in Marie's last name. Because her last name was the same as her husband's, customer service reps simply glossed over the tiny typo. Eventually, they discovered and fixed the mistake.

While Marie was relieved to have the mystery solved after so long, it opened her eyes to a specific challenge facing many widows: "I felt like my coverage was an afterthought once my husband died," she says. "He was the primary account holder, but I wasn't, so I didn't matter. Why did I have to go through all that?"

The time after a spouse dies is stressful and emotional. The last thing widows and widowers need to deal with is the hassle of financial matters — especially anything that might throw their income or security into question.

"Get your ducks in a row," may sound like a cliché, and it is, but methodically making a game plan and working through benefits, titles and terms and conditions on these very important documents can add up to peace of mind when you really need it.

M.P. Dunleavey writes about life and money, as she has for many years, in countless publications (and a book). She now covers aging and eldercare for Next Avenue, Kiplinger and on Squished, a lighthearted chronicle about how to cope with aging parents, young-ish kids and one’s own mortality. Read More