ANSWER: The decision to take an option is the same as the decision to take life insurance: Should I or shouldn’t I? Whether it’s for a lot or a little, the bottom line is the same – it’s a personal choice. In essence, what you’re doing by taking, or not taking, the option is betting on how long you and your beneficiary will live. In this article, I’ll try to provide you with information that will help you make the right choice.

Your first thought should be about the people you care for who depend on you. What if you’re gone? What will happen to them? As you’re probably aware, I was once the commanding officer of the NYPD pension section. In the eight years I served there, I received countless letters from retirees’ widows who said their spouse had told them they’d continue to receive the pension after the member’s death. After looking into the member’s records, I’d often find that the member had chosen the “maximum pension” selection. Then, regretfully, I’d have to inform the widow that her deceased spouse must have been confused when he chose the maximum pension and that, unfortunately, all benefits ceased when the member died. This difficult conversation would often result in questions like: “Is this the way the greatest police department in the world treats the widows of its deceased retirees?” To this there’s no response that can help make things better; all I could do was hope our member had taken out adequate life insurance.

The truth is that taking the maximum pension is usually the proper choice; but you’ve got to couple that decision with an appropriate life insurance policy.

What should our members do when they file to retire? As part of the retirement process, the pension fund counselor will ask the member if he or she is considering an option. The member should always respond that he or she wants a breakdown of the costs of the various options. The costs will then be mailed to you just before your pension is finalized. At that time you will make your decision.

What are the options? There are various options that can leave your beneficiary a pension for life as high as your maximum pension (minus the cost of the option), and down to any smaller amount you wish. You can also choose to leave a one-time lump sum payment. The lump sum payment is similar to life insurance but a life insurance policy is usually preferable because the lump-sum option is subject to federal tax while a life insurance policy is not. The cost of the options depends on the member’s age and – in options leaving an annuity for the beneficiary’s life – the age of the beneficiary.

Whether you retire on a service or disability pension also affects the cost of the options. The younger the beneficiary as compared to the member, the more expensive the option cost will be. The older the beneficiary, the less expensive it will be. Some members mistakenly believe you can only take an option on your spouse. You can, in fact, take an option on anyone.

The main purpose of selecting an option is to provide financial protection for the life of the beneficiary. Future option payments can never be lost on bad investments like a life insurance policy, which can be blown all at once, can.

What are the disadvantages of taking out an option on your pension? Maybe the biggest is that the option cost is retroactive to your retirement date. Since it currently takes years to be finalized, you could owe a large sum of money for a period that you already survived. (In the example of our writer Dennis Broderick, if a particular option costs $3,000 per year, since he retired in February 2006, choosing that option would cost him over $10,000 in retroactive payments.) Another disadvantage to taking the option is that, once chosen, it can’t be changed – that loving spouse you take an option on will remain your beneficiary even if that person is no longer your spouse. A third disadvantage is that your beneficiary may die before or with you. Say you’re married with children and take out an option on your spouse; if you die together in an auto accident, no option would be paid. If you had life insurance and you died together, the life insurance would be paid to your estate and then to your children.

So why would anyone even ask for the cost of the options? The answer is because you never know what the future holds. If when you get the cost and are about to be finalized you find that you have a serious medical problem, you may properly decide to take an option. You shouldn’t care about the option cost if you know you don’t have long to live. Unlike insurance policies, you can’t be denied the right to an option. And the cost is the same whether you’re in perfect health or terminally ill.

As I said at the beginning, the decision on whether to select an option or life insurance is a personal one. I believe in most cases life insurance is the way to go. However, get the costs of both and when making your decision think about those you care about who depend on you, and do the right thing for them.

PBA Pension Consultant Joseph Maccone will answer your retirement and pension questions in print. Write or email at the PBA, 40 Fulton St., NY, NY 10038, or jmaccone@nycpba.org.