What is Pension Insurance?

Jessica Ellis
Jessica Ellis

Pension insurance may refer either to a pension plan, or to insurance purchased to guarantee payments should a pension plan fail. In both instances, the term refers to a type of retirement or benefit plan meant to financially assist people following retirement or disability. Pension insurance may be obtained privately, or through an employment-based plan. While a pension plan helps guarantee a lifetime income, a pension insurance policy serves as a guarantee on the guarantee.

Man climbing a rope
Man climbing a rope

Pension insurance, when defined as a type of retirement plan, is an important means of ensuring that elderly or disabled citizens continue to receive financial benefits. People may be automatically enrolled in a pension plan upon obtaining employment, either through an individual retirement account (IRA), or through taxes levied on all workers to cover a benefit system for the collective group. The general idea of both private and public pension plans is that the worker “pays in” to the system throughout his or her career, so that he or she may be entitled to withdraw from it upon reaching retirement or a certain age.

Individual pension insurance plans allow workers and employers to choose a level of contribution within proscribed limits, while public funds are generally funded through a set tax. A worker generally has much more control over a private pension plan than a public one, though public plans have the advantage of ensuring that even those who worked at low-wage jobs throughout their careers are entitled to some payments.

The second definition of pension insurance refers to a type of insurance plan that gives additional guarantees on pension accounts to the policy holder. Governments and financial institutions often have the ability to borrow from pension schemes to fund other ventures or expenditures; although this “borrowing” mechanism is meant to be safe and temporary, there remains the possibility that an overextended organization could default on its debts, leaving pension plans bankrupt. Just as a bank in crisis may be unable to pay out the accounts of its customers, so, too can a government, or private pension organization, end up unable to repay both its debts and the money “borrowed” from people with pension plans.

A pension insurance plan can help to guarantee that a pensioner receive his or her money, regardless of the financial state of the pension operation. By paying a monthly or annual premium, a person with a pension account can help add an additional level of security to his or her retirement funds by insuring the funds through an outside insurance company. Following the global financial crisis of 2008, and growing concerns in many countries that pension plans are being bankrupted by government borrowing, pension insurance has become a more popular option.

Jessica Ellis
Jessica Ellis

With a B.A. in theater from UCLA and a graduate degree in screenwriting from the American Film Institute, Jessica is passionate about drama and film. She has many other interests, and enjoys learning and writing about a wide range of topics in her role as a wiseGEEK writer.

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