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How to Maximize Your Pension…With Life Insurance

By Byron Udell | September 8, 2017

If you have a company pension plan, before you retire, you will have to decide how your pension payout should be distributed. This blog will give you the lowdown on some important payout options. Learn more about Pension Maximization.

Are you one of the lucky people out there who has a pension plan through your job? Congratulations. A company pension is a valuable asset…and you’ve earned it. That pension is a reward for a lifetime of hard work and dedication. Like Social Security, your pension is designed to provide you with the supplemental income you need to ensure a comfortable retirement.

But as you get closer to your retirement age, you’re going to be faced with an interesting dilemma…deciding which pension payout option makes the most sense for you.

What are my typical pension payout options?

Obviously, every pension plan is different and each will have its own distinct characteristics, but when you retire, just about ALL pensions offer two main payout options: the single-life payout and the joint-life payout.

How different are they?

Let’s say your pension is calculated to be $3,000 a month. With the single-life payout, you would get that full amount every month, like clockwork. But here’s the catch…under the single-life option, the pension payments would END when YOU die.

So if you’re single, fine. No biggie, right? But if you’re married, your spouse might not appreciate that your pension checks will stop coming after YOU die. And even if YOU’RE fine with choosing that option…your spouse would have to sign a waiver in advance, stating that he or she agrees with your decision. (Good luck with that.)

The second option, the joint-life payout reduces the amount of your monthly pension significantly. But when you die…assuming your spouse survives you…that reduced pension check would keep coming, ensuring that your spouse receives a steady stream of income. Those checks will continue to arrive…until your spouse also dies.

To illustrate this point, let’s continue to use that $3,000 monthly pension amount as an example. Under a joint-life payout option, say, that monthly pension drops to $2,000 a month (that’s a big drop, I know), but when you die, that monthly check keeps coming, proving your spouse with some semblance of financial stability.

Obviously, the monetary amounts will vary in every case, depending on the size of your pension, your age, and your spouse’s age.

Which choice makes the most sense?

Well, as they say, “the devil is in the details.” Given these two pension payout choices, almost everyone would choose the joint-life option…even though it means losing $1,000 a month (or $12,000 a year) in retirement income, forever. Yes, you do lose $1,000 a month, but if you die first…your spouse will get to continue the $2,000 a month pension (or $24,000 a year) for as long as he or she lives.

If you die first, and your spouse lives, say, for another 20 years, then that would mean that that joint-life pension payout choice would have turned out, in this case, to be worth $480,000 (20 years x 24,000). Sound like a good deal for your spouse, right? But what if your spouse dies FIRST? Then you will have lost $12,000 a year in retirement income…all for nothing!

Here’s a scenario that you might not have thought of: What if you and your spouse die together? Again, nothing. No benefit for having chosen the joint-life pension option. Your pension dies when you both do. But you certainly paid a lot of money for it, if you both live, say 20 years (20 x $12,000 = $240,000!) into retirement before dying together or within a year or two of each other (a very common event).

There are other possible scenarios that could pay out, to be sure. But you are limited by the payout option you choose. The rest is left to the flying fickle of fate.

Are there other options available to maximize my pension?

What if I told you that there IS a strategy that could help you maximize your pension…and provide you and your spouse with a higher monthly income to live on?

Not surprisingly, this option is called Pension Maximization. And the “active” ingredient in this particular option is…life insurance.

So just how does Pension Maximization actually work?

Let’s go back to that monthly $3,000 pension amount again. Suppose you take that full single-life payout of $3,000 a month and put, say, $700 a month into a $400,000 life insurance policy on your life, instead of electing the joint payout pension choice of receiving just $2,000 monthly. The policy would deliver a level rate of coverage up to age 90. (Note: this rate is based on a 62-year old male in excellent health.)

Yes, you would have $700 less in your monthly pension payout, but that would still leave you and your spouse with $2,300 a month to spend…which is still more than the $2,000 you would have had with the joint-life pension option that we discussed earlier.

Think about THIS: The joint-life pension option…which is offered to everyone in every pension plan in the country…is really nothing more than life insurance anyway. You’re paying money each month…in the form of a lower pension check…in exchange for a promise to pay something to your surviving spouse, BUT ONLY if your spouse survives you! Sounds like life insurance to me!

The other big difference is that, unlike a traditional life insurance policy, which will pay SOMEONE when you die, the joint-life pension option ONLY pays off if…and only if…your spouse survives you. If not, you’ve paid a big price…and got nothing in return.

The concept is pretty darn simple. When you die, your pension checks will stop, but your spouse would then receive the $400,000 death benefit payout from your life insurance policy. And that check arrives…income tax-free. Your policy’s death benefit should easily make up for the $2,000 a month your spouse would have otherwise received with the joint-life pension option.

I know, this is certainly not a conventional choice. But just because it’s not a customary option, that doesn’t mean it’s not a viable alternative to financially protect your spouse after you die.

What if my spouse dies before me, or shortly after I do? What happens to the policy’s death benefit?

Well, if your spouse dies first, assuming you assign a contingent beneficiary on the life insurance policy, your children, or whomever else you designate with receive the money. Under the joint-life pension option, no one gets anything for all those dollars you sacrificed. In short, if your spouse dies first, THAT is a ridiculous option, if you ask me. If your spouse dies shortly after you, whatever is left from the death benefit payout, will presumably be available for your children, grandchildren, or whomever else you both choose.

What’s key to remember, is that when you use life insurance to maximize your pension, at least there is SOMETHING to show, every time, for all the money you spent for the policy!

What if I’m not healthy enough to qualify for a life insurance policy?

If you’re not healthy, then the Pension Maximization option might not make financial sense for you. You might have no choice, but to pursue the joint-life pension option.

The truth is, you won’t know what’s best in your case, until you carefully compare your pension options with and without using Pension Maximization. Every personal and financial situation is different.

Again, this option doesn’t work for everyone, especially those in poor health. But you should absolutely look at the numbers in your individual situation and see what they tell you. A few minutes of your time could mean a BIG difference in your monthly retirement income, and in the amount you may or may not leave behind for your kids and grandkids!

If you need any help or simply want to more information about this Pension Maximization option, just talk to AccuQuote. For over 30 years, we’ve been helping people…just like YOU…get the best deals on life insurance.

We only work with highly rated insurance companies – brand names you trust. You may be able to save money without sacrificing quality and strength.