Pension Maximization is a life insurance strategy that has been around for years.  It is used primarily in conjunction with defined benefit qualified pension plans.  Plan participants who will soon be eligible to receive benefits from a defined benefit plan may wish to consider this strategy. 

Plan participants who will soon be retiring typically have to make an election prior to retiring regarding what type of benefit they will receive. Their choices generally come down to electing a Life Only benefit for the life of the plan participant or some sort of Joint and Survivor benefit that pays a benefit for as long as the plan participant and his/her spouse live.

As you might suspect, the Life Only benefit is generally larger than the Joint and Survivor benefit. Thus, the plan participant is generally making an election involving (1) a larger lifetime benefit with no survivor benefit (Life Only) versus (2) a reduced lifetime income benefit but a continuing income for the surviving spouse (Joint and Survivor).  If the plan participant selects a Joint and Survivor benefit, they are essentially opting to pay a life insurance premium via a reduced income benefit.

Plan participants who are in good health generally have another option for providing their spouse or family with benefit from the value of their pension.  If a life insurance plan with high enough coverage can be purchased with less money than the reduction of income from selecting a Joint and Survivor benefit, then purchasing a private life insurance plan and selecting the Life Only pension income option can be a better retirement planning solution. 

A private life insurance plan is usually a viable option if your health is a bit better than the average member of the pension plan.  This is so because the pension plan, roughly speaking, bases benefits on the average life expectancy of plan members, minus expenses and minus a margin of error.

Adding to the appeal of using life insurance for survivor benefits is that it diversifies financial risk.  This is so because many pensions are not fully funded.  By using a top rated insurance company a plan participant and spouse can eliminate the risk of default by the pension plan for the survivor.  Far more pension plans have gone bust than insurance companies.  In fact, to our knowledge, there has never been a life insurance claim not paid due to the financial hardship of an insurance company. There have been hundreds of pension plans that have failed or suffered reductions of benefits.

In addition, because most pension plans do not include a benefit for value that can be inherited by the children of plan participants, life insurance can be used as a way to pass value of a pension via inheritance.  So, if a life insurance plan can be purchased in an efficient manner, it is clearly a retirement planning consideration to be analyzed.  Contact us to analyze the numbers that impact your retirement.