How much does it cost? For a pilot age 35 to 44, your pension is reduced by 0.01 percent for every month that coverage is carried. For ages 45 to 49 the factor is 0.02 percent and for 50 to 60 the factor is 0.04 percent. Coverage can be terminated or reinstated at any time and you are only charged for the months in which you actually carry coverage. One word of warning, however: If you drop or reinstate coverage, make sure you get a confirmation from the Company that they have received and have processed this change. If you don’t get a confirmation, they may not have received it and you could find yourself being charged for coverage you didn’t want, or worse yet, find yourself without coverage and have something terrible happen leaving your spouse unprotected. We cannot stress enough in this day of lawsuits and burden of proof, send your paperwork via some method that provides tracking or a receipt such as certified mail with a return receipt or via air express. Also keep a copy of all paperwork transmitted. Put it in your safety deposit box or fireproof safe; you never know when it will be needed. It’s easier to correct a mistake when you hold the necessary proof. Trust us when we say we’ve already seen it happen.

What do these charges mean and how do I pay them? Let’s say you elect the QPSA as soon as you turn 35 and carry it until you retire at age 60. That means you have carried coverage for 25 years (300 months). 120 months were carried at 0.01 percent, 60 months were carried at 0.04 percent and 120 months at 0.04 percent. This means your pension will be reduced by 7.2 percent for carrying the coverage all along. How does that work? Let’s say you retire with 30 years of service at age 60 and final average earnings of $15,000 per month.

The calculation in Example 1 above shows that it has cost you $702 of your monthly retirement income to cover your spouse for that entire 35-year period. Many pilots carry life insurance instead of QPSA because life insurance is cheaper when you are young. However, you must be careful to carry enough insurance to provide the same level of benefit to your spouse.

Other pilots will opt out of the QPSA and resume coverage when they reach their fifties. Health problems at this age begin to make the life insurance more costly. Also, the retirement benefit is increasing due to being promoted to larger aircraft, contractual pay increases and the like.

A continual review of the insurance coverage must be done as the facts change to ensure that coverage is sufficient. Some find it easier just to pick up the coverage under QPSA and not worry about making life insurance premiums. They choice is very personal and up to you. Only you know what is right for your particular situation.

Let’s do another example using one of those pilots who picks up coverage at 50. He’s also a 30-year employee with Final Average Earnings of $15,000.

Example 2 above shows that he’s only paid $468 from his monthly retirement earnings to cover his spouse for ten years. You must also look at the cost in terms of the reduction to the lump sum since this is the option most chosen by retiring pilots.

To convert an annuity to a lump sum, you must know the PBGC Rate and the age at retirement. A corresponding factor can be found on the Lump Sum Factor Chart below.

Lump Sum Factors

Let’s say the interest rate is four percent and this pilot is age 60. We would then multiply his Single Life Annuity of $9,282 (after reduction) by 12 months to make it annual and then by 11.691960 to get a lump sum of $1,302,297.27. If he had not chosen the QPSA, his full lump sum would have been $1,367,959.32. He gave up $65,662.05 in lump sum monies to provide coverage prior to retirement.

Again, we must stress that the choice is entirely up to you and only you can decide. If you are undecided about whether you should carry QPSA coverage or life insurance instead, discuss it with your spouse and consult your financial planner if you have one. It’s a big decision and a difficult one. We’ll answer any questions we can.