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Insurance in the Pension

Without a doubt, the subject that about which most people I have encountered are the least knowledgeable is the insurance part of the pension.  This is a huge shame because not only does ignorance of this subject lead to wasting thousands of shekels on unnecessary insurance, but it can also lead to people not having the right kind of insurance and suffering needlessly in the case of an accident.

There are three types of ways someone can collect money from his or her keren pensia

(1)   By becoming disabled (פנסיה נכות)

(2)   By dying (פנסיה שארים)

(3)   By becoming of pension age (called פנסיה זקנה)

Disability:  Pensia Nechut (פנסיה נכות):  If, God forbid, someone paying into a keren pensia meikifabecomes disabled before reaching retirement age, he or she is eligible to collect pensia nechut, or disability.  In this case the person receives up to 75% of his or her salary every month, depending on how the insurance is set up.  The money to pay for this insurance comes from the money saved in the pension fund, which means that you don’t have to pay extra for it, but it gets deducted from the amount you’re saving for retirement (from the תגמולים, not the פיצויים, which can never be touched.).  The good thing about this is that it comes at the cheapest possible rate because no agent is getting paid for this (they get paid based on the fees of the pension, not the amount taken out for insurance).  It is also of note that with some exceptions, most people are not covered for disability due to preexisting conditions for the first 5 years of paying into a pension.  In most companies, you can get paid if you are partially disabled (at least 25%).  Like most disability insurance, there is a waiting period of 3 months, although depending on the company, there are some way to get around this (ie extra large payment if you are still disabled in the 4th month).  Also, this amount is reconciled against any coverage you’d receive from Bituach Leumi (National Insurance).

Death:  Pensia Shearim (פנסיה שארים):  If, God forbid, someone paying into a keren pensia meikifa dies before retirement age, his or her spouse will continue to receive a portion of the deceased’s income (usually 60%, depending on the company and specific pension option) for the rest of her life (even if she remarries).  In addition, each child gets a portion of the salary (usually up to 30%, depending on the company and specific pension option) until the child reaches 21.  There is also an option to have coverage for a dependent parent for as long as they live.   In the case of all of these, it is incumbent upon the individual to choose how much coverage he wants for each of these options based on a scale in accordance with the age when the person joined the pension.  It is imperative that you ask for the different options and choose the one that suits you.  Like pensia nechut, the money for this insurance is very cheap and is deducted from your savings for retirement.  If you are single or without children, you need to inform your pension company about this and fill out a form every 2 years stating that they should not deduct for insurance for a spouse or children (you need to do it every 2 years because they are afraid that you’ll forget to tell them when you get married, so the insurance goes back to the default every 2 years).

When you sign up for your pension, you choose what level of insurance you’ll have with your pension.  If you didn’t choose, then you were given the default, which is usually but not alwasy maximum coverage.  If you’re unsure what you have, the amount you are covered for nechut and shearim is listed on your quarterly and annual reports from your pension.  Alternatively, you can call your agent or pension company and ask what you have.  If you find out that you are not insured correctly, ask the pension company to correct this as soon as possible.  Remember, this insurance may not cost any additional money, but it is up to you to make sure that the company is giving you the right level of insurance. All you have to do is call and ask for the proper amount of insurance.  As always, put everything in writing (send an e-mail after the conversation summarizing it) so that you have a record in case something happens.

Pensia Zikna (פנסיה זקנה):  When one reaches pension age and begins פנסיה זקנה, he or she begins to receive his or her monthly annuity, or gamla (גמלא).  Normally, the first 240 gamlaot are guaranteed, so if God forbid the person dies, the heirs will continue to receive the monthly annuity for the first 20 years of the deceased’s retirement.  A person can choose to have less guaranteed gamalot in return for a slightly larger annuity.  In addition, the retiree can choose how his pension will be continued to be paid once he or she dies.  For example, most people have it automatically set up that if the pensioner dies, the spouse of the pensioner will get 60% of the annuity for the rest of his or her life.  Again, you can play around with this and get a larger or smaller annuity based on the amount of insurance you are getting with it.  This kind of insurance is called she’irai pensioner (שאירי פנסיונר), literally the leftovers of the pensioner.

Some important observations:

(1)   Usually, the only people who need additional life insurance are housewives and part time working mothers.  Unlike their full time counterparts, these workers will not have their economic contribution to the household covered in the event of their death. 

(2)   Unfortunately, the law only allows disability to cover up to 75% of a workers’ salary.  The problem with this is that not only does a disabled have to replace his economic contribution to the house, but unlike if her were to God forbid die, being disabled costs money (hiring a caregiver etc.)  In the past, i would advise people to purchase private disability insurance (which have a number of additional features – see here), but unfortunately, the law changed so that you cannot get additional private insurance if you pay into a keren pensia meikifa.  The reason for this law is supposedly to avoid people paying unnescessary amounts for insurance (since you have to pay a minimal amount in the pension and you’d pay for the private insurance which covers the same), but in truth, it forces people who need better coverage to get bituach menahalim instead of a keren pensia, which means that they will end up paying hundreds of thousands of shekels in additional fees, much more than than the amount they would be willing to throw away on the unnescesary insurance from the keren pensia. In my more recent experience, this means that one must consider strongly the limits of his insurance coverage when considering opening a keren pensia, and if the need merits it, consider an alternative option.

(3)   If you collect money from your pension for death (פנסיה שארים), you lose the money you saved for retirement.  This usually isn’t a problem because you’d prefer a spouse to get 60% of your salary than the lesser amount for the pension, but this is a huge problem for single parents, who could in some cases chance their kids getting very little (just the payout until they turn 21).  In this case, it is advisable to switch to bituach menahalim or choose from among the kranot claliyot until the kids turn 21.  After 21, since there is no insurance for the kids to be paid, the kids can split the pension in the event of the death of the parent and it will be worthwhile to return to the lower fees of the keren pensia.

(4)   The system I outlined above only applies to a keren pensia meikifa  and is optional in keren pensia clalit (meaning that for a keren pensia clalit you can choose whether or not to have it).  Alternatively, bituach menahlim allows you to get any kind of insurance you want (that is the good part about it; the bad part is that the fees are higher).

The job of a good pension analyst or agent is to help you choose the right insurance based on your needs.  But you need to insist on it – do not leave something this important to chance.

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