Pensions may pay a death benefit to your spouse if you've elected to leave money for your spouse. Notice that this is only available if you have not opted to take the lifetime payment from your pension. Otherwise, your spouse should understand what death benefit options are available to her when you die.
Lump Sum Amount
A lump sum amount is one option that your spouse has when you die. A lump sum amount means that your pension administrator will offer your spouse the option to take a lump sum of money that has been saved aside by you as part of your pension payment plan. If you chose to take a reduced pension, part of your pension was saved aside for this purpose for your spouse. The lump sum can be rolled into an IRA or taken as a full distribution. Full distributions are subject to income tax.
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Your spouse can elect to receive annuity payments after your death. An annuity payment is exactly what you have been receiving as part of your pension. Your spouse will receive payments based on her age when you die and she starts receiving payments. These payments may extend for a set number of years or for her lifetime.
The benefit of a pension death benefit is that your spouse gets to choose how to take benefits. This is a huge advantage since your spouse may be in need of immediate cash after your death. This is especially true if there is not enough life insurance to cover your final expenses or she needs the ability to pay for some other expense (i.e. paying off the mortgage) after you die. This puts your spouse in full control of the pension instead of being forced into taking just one option regardless of her needs and wants.
The option that your spouse chooses depends entirely on her wishes and desires after your death. However, the decision should be based on solid financial goals. Unless there is an immediate need for a lump sum of money, annuity payments may be the best option since payments will ensure that your spouse does not run out of money when she needs it most.