WHEN YOU FINALIZE YOUR PENSION, WHAT OPTION SHOULD YOU CHOOSE?
Before the New York City Police Pension Fund finalizes your pension, you may either choose a pension option or the Maximum Retirement Allowance. Choosing the Maximum Retirement Allowance means that all pension benefits will cease on your death; choosing an option provides for a beneficiary or beneficiaries after your death. The cost of the option depends on your age, and the age of your beneficiary, as of your retirement date.
If you want the Maximum Retirement Allowance, but also wish to provide for a beneficiary, you could explore commercial insurance policies or annuities.
Effectively with all the Pension Fund options you are buying life insurance in some form or another, with certain actuarial assumptions baked in. All options are based on life expectancy for yourself and the beneficiary when you take an option other than full pension. There is an important distinction here though. Life insurance underwriting is very much subject to the insured’s health and since the Pension Fund options cannot test your health, they must assume a substandard health condition in their actuarial calculations for your cost. It is like those life insurance policies you see advertised on TV where they say “no medical exam and you cannot be turned down.”
So if your health is good (or even mediocre) you are better off buying your own life insurance rather than take the high rate life insurance the pension option offers. Also, having your own policy allows you to change beneficiaries for whatever reason you wish, and you also can cancel the policy and the payments should you no longer need it.
So if you can get a good policy based on your health you are better off, but make sure you lock in a good rate for a long term since it is very expensive later in life to extend your coverage. Many people make the mistake of getting a full medical work-up before applying for insurance because any problems discovered will be disclosed to the insurance company. Better to let them give you the exam, which is usually superficial and given at home by a nurse.
If you have time before you need a policy get yourself into the best condition possible before taking the insurance exam; lose weight, etc.
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