What is a Defined Benefit pension plan?

Home / General / What is a Defined Benefit pension plan?

This week, we’re taking a look at the very basic description of a Defined Benefit pension plan. These are sometimes referred to as DB plans, or DBPPs. The other main type of pension plan is known as a Defined Contribution pension plan. A newer type of pension plan is the “shared risk” model, also known as a “Target Benefit” pension plan. We’ll go through all three in the next few weeks.

Related Posts
Showing 2 comments
  • Shelley Foster

    Hi Preet!

    I have a question about mortgage insurance. Hoping you can help. I have just heard that some companies have insurance that will not only pay a mortgage on the mortgagee’s death, but also if they come upon an illness that stops them from working and able to pay their mortgage. Do you have any thoughts on this?

    Thanks,
    Shelley

    • admin

      Hey Shelley, hope you are well!

      Yes, lots of thoughts on this. I’ll shamelessly plug my book which covers this in more detail, but here’s the short of it: when you get the insurance from the creditor (in this case the company offering you the mortgage), this tends not to be as robust a policy as compared to a life and/or disability insurance provider from an insurance company.

      Here’s why: creditor based insurance normally has the underwriting performed at time of CLAIM (i.e. when you die or become disabled). A private life insurance policy (or disability policy) that is underwritten at time of APPLICATION is much better. On top of it possibly being cheaper, when the underwriting (the process of determining if you qualify for the coverage) is done at application, you know you are covered. If you have the creditor based insurance where the underwriting is done after the fact, they may determine that you weren’t qualified for the coverage and instead of paying your mortgage off, or paying an income if disabled, will simply refund the premiums you had paid (which will generally be a small fraction of what you were expecting).

      So while a private policy may entail a nurse coming to take saliva, urine, and blood, when you get the policy, you know you’re covered with very few exceptions (e.g. there is a 2 year suicide clause which means the policy won’t pay out if you commit suicide within the first two years of the policy, but after the 2 years, as long as it wasn’t planned when getting the insurance or as part of some insurance fraud scheme, it would even pay out if you committed suicide).

      My advice: get an insurance agent to get you a quote for the coverage you want. You may find it is cheaper anyway, but even if not, it’s better to have a more robust policy instead of one that you don’t even know you qualify for until after the fact.

      There are many other benefits of private insurance instead of creditor based insurance as well. Your agent will be able to walk you through it all (or get the book! 😉 )

      Preet

Leave a Comment