NEW JERSEY LAW ENFORCEMENT PENSION PLAN
DIVORCE
DECREASING TERM INSURANCE IS A SUBSTITUTE FOR SURVIVOR ANNUITY PROTECTION FOR A FORMER SPOUSE
The focus of this article is a State Retirement Plan that prohibits a Survivor Spouse designation for a Former Spouse.[1] A reading of the applicable statute reveals that a “Former Spouse” is specifically excluded from the definition of “surviving spouse”. As a result in New Jersey the divorced spouse of a Law Enforcement Officer cannot be a designated as a “surviving spouse beneficiary” in a Qualified Domestic Relations Order. Upon the death of the Police Officer, all pension payments to the Former Spouse terminate.
Additional documentation for this exclusion is found at, La Sala v. Alfred La Sala, and Police and Firemen’s Retirement System, 760 A.2d 1122, November 3, 2000, Decided and Member Handbook. Additionally see: State of New Jersey Police and Firemen’s Retirement System, Department of the Treasury Division of Pensions and Benefits. The Division of Pensions defined “spouse” as:
‘Spouse’ — A person to whom you were married on the date of your death (emphasis mine) and who has not remarried or entered into a civil union… A photocopy of the Marriage Certificate is required for verification.
Consider This.
Because New Jersey by statute, does not permit a Former Spouse to be the surviving spouse of a New Jersey Police Officer or Firefighter, the intrinsic outcome is that such Former Spouse has only been awarded a “Contingent Future Interest”, subject to the survival of the Police Officer or Firefighter. The participant’s death at any time subsequent to retirement extinguishes Former Spouse’s portion of the retirement benefit.[2]
Suggested Mitigation.
Decreasing Term Life Insurance.
The reader will note the term “mitigation” not “solution”. A comprehensive “dollar of protection” for “dollar of benefits” solution is generally unavailable (see Charts Below). What is offered is a palliative to minimize the Former Spouse’s loss of critical economic succor at a time when child care and other financial obligations are most burdensome.
Significance of this Lost Benefit to a Former Spouse.
This is best discussed by working from a simple illustration to graphically represent the likely magnitude of this loss to a Former Spouse. The illustrations are based on the case of a New Jersey Law Enforcement Officer divorcing at age 41. The Former Spouse’s age was 39.
Fact Background
Plan: New Jersey Special Risk Class (Law Enforcement)
Law Enforcement Officer (LEO): Tom Walther
Spouse: Jane Walther
Tom’s Date of Birth: 11/1/1969
Jane’s Date of Birth: 11/1/1970
Date of Marriage: 11/1/1993
Tom’s Hire Date: 11/1/1992
Date Action for Divorce Filed (DAF): 11/1/2017
Tom’s Age at DAF: 48
Jane’s Age at DAF: 47
Tom’s Monthly Accrued Benefit at DAF:[3] $5,958.33
Coverture Fraction: 96%
(24 yrs. ÷ 25 yrs.)
Jane’s Monthly Award: $2,860.00
($5,958.33 * 96% * 50%)
Jane’s Pension Award.
Because Jane, as the divorced spouse of a Law Enforcement Officer (LEO), is by statute not eligible for any survivor benefit from Tom’s pension, Jane has in effect been awarded a “contingent” interest, that is totally dependent on Tom’s survival. Moreover, should Tom die prior to retirement, Jane receives nothing from the pension. If Tom dies after retirement, Jane receives a monthly benefit only up to Tom’s death, then nothing.
Commentary.
The informed practitioner recognizes that a Law Enforcement Officer (LEO) as an active employee is given life insurance equal to not less than 3 ½ times compensation at the time of death.[4] For Tom as an active employee with annual compensation of $110,000.00, his insured death benefit is $385,000.00. Upon retirement, this coverage drops to $55,000.00.[5] For this article it is assumed that Tom, upon divorce retired. This assumption, keeps the mathematics simple. The mathematical algorithms employed for an active employee are somewhat more complex, requiring many calculations. For your specific matter involving an active LEO request specific calculations from Troyan.
Calculation of the Value of Jane’s Interest in Tom’s Retirement Benefit.
For this article we assumed Jane’s age at divorce was 47. Jane has two dependent children living with her:
· An eighteen year old physically challenged daughter
· A fifteen year old son attending high school
Pursuant to the divorce settlement Jane is to receive from Tom’s monthly Retirement Allowance, $2,860.00. [6] This monthly check from Tom’s pension is essential to Jane’s family sustenance. Because receipt of this monthly pension benefit is contingent upon Tom’s survival, Jane’s attorney seeks to insure the continuance of this benefit should Tom die.
Commentary:
Whole Life Insurance has many advantages over Term Life Insurance. However, it has one significant disadvantage, high fixed cost. Because of the significantly higher cost of Whole Life Insurance, this discussion is limited to lower cost Term Life Insurance.
Clarification.
The purpose of this Life Insurance is to have available should Tom predecease Jane a single sum (insurance death benefit) that will be equal to the sum necessary to the present cash value of the monthly benefit Jane is receiving from Tom. This is the sum that Jane would then use to purchase an income annuity equal to her lost monthly award of $2,860.00.
This process begins with a calculation of the worth of Jane’s share of Tom’s LEO pension at the time of divorce.
Jane’s monthly award: $2,860.00
Present Worth of Jane’s monthly benefit; $415,571.65 [7]
For Of Insurance is 30 Year Decreasing Term
A Technical Aside.
Thus, to insulate Jane from penury, $415,571.65 is required, as of the date of Divorce. The worth of this initial “decreasing term” insurance over time is shown below.
ILLUSTRATIONS.
Two charts are offered. The Headings of the three parts to each Chart are:
Jane’s Age
Pension Value
Insurance Amount
Clarification of Table Headings.
Jane’s Age. Self-Explanatory.
Pension Value.
This statistic represents the present cash value of the annuity at the time of Tom’s death. For example, at Tom’s age 53, the worth of Jane’s monthly annuity shown on Chart # 1 is: $407,703.43.
Insurance Amount.
This statistic represents the amount of “death benefit” that would be paid to Jane if Tom died at this age. For example, if Tom died at age 53, the death benefit paid to Jane shown on Chart # 1 is: $326,162.75
Thus it is clear that based on this chart, there would be a loss to Jane of $81,540.69. As you examine both charts below you can see why the term “palliative” was used above.
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CHART # 1
Jane’s Age Pension Value Insurance Amount
47 $421,927.10 $421,927.10
48 $419,811.36 $405,817.64
49 $417,764.22 $389,913.27
50 $415,571.65 $374,014.49
51 $413,223.32 $358,126.88
52 $410,417.89 $342,014.91
53 $407,703.43 $326,162.75
54 $404,796.13 $310,343.70
55 $401,682.29 $294,567.02
56 $398,347.24 $278,843.07
57 $395,184.36 $263,456.24
58 $391,387.69 $247,878.87
59 $387,321.30 $232,392.78
60 $382,966.02 $217,014.08
61 $378,835.59 $202,045.65
62 $373,877.47 $186,938.74
63 $369,175.32 $172,281.82
64 $363,530.93 $157,530.07
65 $358,177.93 $143,271.17
66 $352,488.20 $129,245.68
67 $346,440.56 $115,480.19
68 $340,012.49 $102,003.75
69 $333,180.07 $88,848.02
70 $325,917.85 $76,047.50
71 $319,189.63 $63,837.93
72 $311,047.34 $51,841.22
73 $303,503.76 $40,467.17
74 $295,546.56 $29,554.66
75 $287,153.07 $19,143.54
76 $261,977.46 $8,732.58
77 $253,239.03 $0.00
CHART # 2
THIS CHART SHOWS HOW A LARGER INITIAL INSURANCE AMOUNT OPERATES TO MINIMIZE THE LOSS TO JANE. [8]
Jane’s Age Pension Value Insurance Amount
47 $421,927.10 $600,000.00
48 $419,811.36 $580,000.00
49 $417,764.22 $560,000.00
50 $415,571.65 $540,000.00
51 $413,223.32 $520,000.00
52 $410,417.89 $500,000.00
53 $407,703.43 $480,000.00
54 $404,796.13 $460,000.00
55 $401,682.29 $440,000.00
56 $398,347.24 $420,000.00
57 $395,184.36 $400,000.00
58 $391,387.69 $380,000.00
59 $387,321.30 $360,000.00
60 $382,966.02 $340,000.00
61 $378,835.59 $320,000.00
62 $373,877.47 $300,000.00
63 $369,175.32 $280,000.00
64 $363,530.93 $260,000.00
65 $358,177.93 $240,000.00
66 $352,488.20 $220,000.00
67 $346,440.56 $200,000.00
68 $340,012.49 $180,000.00
69 $333,180.07 $160,000.00
70 $325,917.85 $140,000.00
71 $319,189.63 $120,000.00
72 $311,047.34 $100,000.00
73 $303,503.76 $80,000.00
74 $295,546.56 $60,000.00
75 $287,153.07 $40,000.00
76 $261,977.46 $20,000.00
77 $253,239.03 $0.00
Life Expectancy.
Based on the U.S. Department of Health and Human Services, Centers for Disease Control and Prevention, National Center for Health Statistics, National Vital Statistics System. National Vital Statistics Reports, Vol. 66, No.3, April 11, 2017, at age 77,Jane’s life expectancy is 10.9 years. From this point forward, Jane is without any mitigation as a result of the Tom’s death.
Conclusion.
To mitigate the impact of the loss of an Alternate Payee’s right to a Former Spouse Survivor Annuity, the attorney representing this disadvantaged spouse may elect to consider use of an appropriately calculated amount of Decreasing Term Insurance. This is as the two Charts reflect, not a total solution, rather it is a best effort to mitigate the harsh impact of a New Jersey Statute.
Finally, if Tom, retired, remarried and died one year later, his spouse of one year would collect a “Full Spouse Survivor Annuity”. For Jane, Nothing!
[1] 43:16A-1 Definitions relative to Police and Firemen's Retirement System.
[2] For this plan a “preretirement” survivor benefit does not exist.
[3] For ease of illustration, we have retired Tom with 25 years of service. Fortunately this occurred on the date the Action for Divorce was filed.
[4] Active Employees ONLY!
[5] One half of Final Compensation.
[6] Retirement Allowance is a synonym for “Pension”.
[7] Based on Retirement System’s current actuarial investment rate of return (7.65%).
[8] The larger insurance amount gives Jane, ten more years of enhanced security, and a slower rate of decay of benefits.