Married employees nearing retirement face a complex decision regarding what to do for their pension income option. Pension Recipients must choose between a "straight-life" pension benefit, versus a "joint-survivor" benefit (often more than one option). The straight-life option provides the employee with the maximum pension benefit, but stops once the employee dies, leaving nothing for the surviving spouse. Under federal law, the spouse must approve of this option. The joint-survivor option provides monthly payments that are less than single-life, but which also contain a reduced benefit for the surviving spouse.
Financial advisors sometimes suggest an alternative to the joint-survivor option, called "PENSION MAXIMIZATION". With Pension Max, the pension recipient elects the "straight-life" income option and uses a portion of the monthly income to buy life insurance to protect their spouse. There are several key advantages to Pension Max
- A pension recipient may net a higher income by buying insurance protection privately to protect a spouse's future income and standard of living, rather than using the joint-survivor benefits through the pension plan.
- When the pension recipient dies, the surviving spouse gets the Life Insurance Benefit PLUS the income it produces, not just the income from the joint-survivor benefit.
- Premiums may be discontinued or partially recovered if the spouse dies before the pension recipient. You will never recover lost pension income.
- In many cases, there is a significant inheritance left for family and heirs versus nothing if the "joint-survivor" option were elected.
- Possibly the most important reason to use life insurance rather than joint-survivor benefits is that strong life insurance companies are often stronger financially than pension funds. Almost half of pension funds in America are not fully funded; that is, their obligations are higher than their assets. Highly rated insurance companies carry cash reserves far greater than they will ever need in all likelihood.
Health considerations and age are the primary factors in getting favorable underwriting for any life insurance plan. For that reason, it makes sense to do your retirement planning as far in advance as possible of retirement. Most pensioned employees should consider buying low cost term-life insurance when they are younger, that is CONVERTIBLE into a permanent plan later, WITHOUT EVIDENCE OF INSURABILITY. Even when near retirement, for most non-smokers in average or better health, and smokers in good or better health, it will often make sense to buy protection privately.
For those with existing Whole Life, Variable Life or Universal Life, these policies can often he used as the base in a Pension Max plan. In some situations, keeping these policies in force will allow for less new insurance to be needed. In other cases older less efficient plans can be used to fund a newer plan if your health is good.
The decision to use Pension Max depends on the merits of your situation. We can help you "Run the numbers" to see if Pension Max works for you. Never select an option you haven’t fully analyzed. Contact me by email or by telephone at 414-617-6669, I have worked with pensioned employees from multiple employers and unions.
