For a long time, life insurance has been used in pension planning. When deciding what pension option to take, many times life insurance can pay a huge role. Using life insurance in the planning process can increase your monthly pension income substantially. We call this pension maximization or pension max for short. You would call this more pension income at retirement.
Investopedia defines pension maximization as “a cash flow analysis that is used to determine whether a retiree’s pension dollars can be stretched further with the purchase of a life insurance policy.”
For spouses, this is an excellent option as it allows one to gain death benefit protection in the event of the death of the other while at the same time increasing the monthly pension payout at retirement.
There are really two main options that are available when deciding to retire. Well, there are two main options with several deviations of each. We will cover the simplest of these, the life only option and joint and survivor option.
So let’s jump in:
First off, I have spent many years working with clients that have a pension from their employer available to them. This is becoming a rare thing, but most state employees and postal workers are still provided with pensions. This has been a big focus for me and today both my parents as well as many of my clients are able to enjoy a great retirement because of the pension max planning we were able to do.
Life Only Option
This is a pension option that enables you and your spouse to receive the highest possible monthly benefit. However, when the spouse with the pension dies the other spouse will receive no more pension payments. This is not usually the option chosen for married couples unless they have planned with life insurance. We usually recommend a guaranteed indexed universal life insurance policy in this situation. I will explain later. When one of you dies, the other spouse will no longer be able to receive payments. If you are both in great health, and look like you have years ahead to enjoy together, this is a good option as it enables you to get a large monthly benefit for your retirement.
Joint and Survivor Option
When the joint and survivor option is chosen, pension payments are received every month, even in the event that one of the spouses die. This sounds great and it is usually the option that is chosen. The downside however is that the monthly pension income is much less than when choosing the life only option. This could be a disadvantage as it may become challenging to maintain the same standard of living that is currently enjoyed.
The goal of pension max is to get the highest monthly income as possible. Assuming the spouse that will receive the pension is healthy enough to qualify for life insurance, we can do this pretty simply. We like to use indexed universal life insurance due to the fact that this policy will build a tremendous amount of cash value that can be used in a variety of ways.
Why Should You Choose Life Insurance to Maximize your Pension?
As you know, life insurance pays a lump sum at the death of the insured. If you are lucky and have a pension, once you stop working you will continue to receive a monthly income during your retirement years. Generally, this will last until you die unless you have chosen a survivor option. As you get closer to your retirement and begin to plan for the big day, you may realize that the amount you will be receiving as your monthly payment may not be enough to support your needs and your lifestyle. This may be the time that you consider taking out a life insurance policy that will pay a lump sum or even an income stream to your spouse when you die. Doing this will allow you to take a much larger income from the pension by selecting the life only option.
Reading this article may even give you the foresight to act now, way before you retire. The earlier you start, the lower your premiums will be. If you use an indexed universal life insurance policy, you could be in a situation that allows you to take tax-free income from your policy in addition to your pension income to create an even larger retirement income.
So with a pension max strategy, you really have the best of both worlds. You can take you’re your maximum pension income and also leave your spouse with enough life insurance to offset what they would have received from the survivor option from your pension. You do not have to worry about what will happen to you or your spouse in the event that one of you passes on. This will allow you to take life only option, where you can maximize the amount that you receive as your pension on a monthly basis.
In order for pension max to work, your spouse should be named as beneficiary. This way the surviving spouse is sure to receive the death benefit proceeds. When the person receiving the life only pension dies, the pension income stops! This is where the life insurance comes in to play. The surviving spouse can now maintain the same standard of living that they have been accustomed to. This brilliant way of maximizing your pension takes advantage of the benefits that you can get from life insurance as well as from the pension itself.
Now what happens to this equation if the spouse that is not receiving the pension dies first? That means that the pension income will continue to be received for as long as the pensioner lives. In addition to this, the life insurance can be cancelled and cashed in for the cash value, the beneficiary can be changed to children, grandchildren or even a charity. Planning early will make retirement less stressful and more enjoyable.
Your next step to more pension income at retirement
The best way to see if this will work for you is to start with your human resource department. We can help guide you with what questions you need to be asking. Your human resources department can provide you with the pension income options that are available to you depending on when you will retire. Once we know these numbers, we can put a proposal together that will work best for you.
It doesn’t matter if you are 20 years away from retirement of thinking of retiring in the next 6 months, the pension max strategy can work for you.
You can use the quote request form to the left or call us at 1-800-712-8519 to find out more about pension max. We can send you our guide to pension max, just contact us today.