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Life and Health


By April 1, 2009No Comments

Most people try to hedge their bets when it comes to their finances, and planning for retirement is no exception. The goal is usually to earn the maximum return possible on the money we invest. One way to accomplish this is through a concept known as Pension Maximization. You should explore this strategy with your insurance agent if you plan to use pension income to generate your retirement income, because Pension Maximization could allow you to increase your monthly payments.

When a couple decides to start drawing on their company pension, they generally choose a joint and survivor option, which will provide a monthly income until both spouses die. The amount of your monthly income is based on how long an actuary thinks both of you will live based on your current age. The longer both of you are expected to live, the lower the monthly income.

With Pension Maximization, you can reverse this. Instead of opting for a joint and survivor payment, you take the single life, or straight life, option. Since the insurer is only providing income for the life expectancy of one person, the monthly income will be higher than that provided by the joint and survivor option. You also will receive a higher income because you aren’t receiving a term, or period certain, guarantee with this option.

However, if the covered spouse dies suddenly, monthly payments stop. To compensate for this risk, you can use some of the additional income — the difference between the higher monthly income that the straight life option pays and the lower monthly income of the joint and survivor option — to purchase a Life insurance policy on the covered spouse. So, guaranteed ongoing income for the surviving spouse is provided through the Life insurance policy instead of through the deceased spouse’s pension. Even though the survivor loses the pension income, he or she has the death benefit from the Life insurance policy, which can be used to purchase an income annuity that provides a monthly payment. And it’s likely that the survivor is now much older, so he or she might be able to generate a higher income due to a decreased life expectancy.

So far we’ve only discussed what happens if the person covered by the pension dies first. But what if their spouse dies first? With a traditional joint and survivor option even when one spouse dies the other spouse continues to receive the same monthly check. But with the Pension Maximization strategy, the covered spouse now has the option to either keep the Life insurance policy, perhaps for estate liquidity or charitable purposes, or surrender it and receive any cash value. Plus they’ll have the higher income provided by the single life pension option for the rest of their life.

Keep in mind that this Pension Maximization strategy doesn’t work in every instance especially if the covered spouse is not likely to qualify for Life insurance based on their health history. In any case, before you make an irrevocable decision regarding your pension payments, please give us a call to learn if Pension Maximization is right for you.