Many people look forward to retirement, when all those years of planning and saving begin to bear fruit. At retirement, however (or even prior to retirement), you may be asked by your employer to make an irrevocable choice – a choice you cannot change (once elected). You may be asked to choose between a higher payout with no survivorship benefits, or a lower payout that includes survivorship benefits to a spouse.
Life-only Option – pays a maximum benefit from your pension or profit-sharing plan while you’re alive, but the payment terminates upon your death. If you died the following week after you begin the payout, you’ve lost the rest of the value remaining in the pension.
Survivorship Option – pays you less money while you and your spouse remain alive, but guarantees an income to your spouse if you die first. If your spouse dies first, however, you continue to receive the lower payout for the rest of your life, even if your spouse never received a dime of income.
A pension maximization program may help solve the problem. Take a look at the numbers. Compare the difference between a “life only” option (which pays you the highest level of income while you remain alive, and terminates upon your death) vs. the “survivorship” option (which pays a lower monthly benefit but guarantees an income to the spouse, if she remains alive, upon your death). If you select the “life only” option, and take the amount of the difference between the two values and purchase a life insurance policy, your pension payout will terminate upon your death but you will guarantee income-tax-free proceeds to your spouse. The life insurance policy also pays out in a lump sum, versus the pension paying out over a number of years.
If you elect a pension maximization approach to your retirement income, it is recommended that you purchase an amount of life insurance that could generate an income similar to what would have been received under a survivorship benefit from the retirement program. Pension maximization is usually done in combination with permanent coverage (universal life insurance or whole life insurance), though term insurance will allow you to purchase a larger death benefit for the period of time you choose. Please be sure to factor in any cost-of-living adjustments provided by your plan to the spouse.
Of course, health and age become significant factors in determining when to purchase the insurance. By purchasing the coverage at an earlier age, you guarantee that your state of health will not be an issue when you retire, and you purchase the coverage at a lower rate (due to the purchase at an earlier age).
If the spouse dies first, the retiree can surrender the life insurance policy for its net cash surrender value, or continue the coverage to provide an income-tax-free death benefit for the children (or grandchildren). If the retiree dies first, the spouse can make her own decisions about the investment of the proceeds, and, if an annuity is purchased with the proceeds, part of the monthly income can be received income-tax-free (pension plan payouts are typically a fully taxable benefit).
Other points of consideration include the loss of rights to medical coverage if the employer has linked its continuation to the receipt of survivorship income from the pension plan.
If the difference between the lifetime payout and the survivorship payout is slightly less than the premium for the additional life insurance (i.e., additional monies are needed to pay premiums), you would need to determine if the additional premium is worth the flexibility of changing beneficiaries (if your spouse pre-deceases you), and if the additional premium is worth the ability to create proceeds for your children (and grandchildren).
Your agent will be able to go over the benefits of a pension maximization in further detail. It is a significant part of your planning process for your retirement.
If you have any questions or would like to discuss pension maximization in further detail, please give us a call at 1-800-571-2980 from 9 AM to 9 PM or e-mail us at Info@terminsurancebrokers.com 24 hours a day. You can also fill out the short form below: