Maximize Your Pension with Life Insuranceby Byron Udell, AccuQuote Founder and CEO
If you’ll be getting a pension in retirement, you have a lot of decisions to make. One of the most important is deciding whether to choose the “single life” or “joint and survivor” option.
“Single life” will give you the most monthly income for your entire life. But when you die, the income ends. This option is therefore usually best only for people who are single, because if you are married and your spouse outlives you, your spouse loses the pension income you’ve been receiving when you die.
That’s why most married people select the “joint and survivor” option. This option pays income for as long as you live — and keeps paying after you die, for as long as your spouse lives. But the income you both get is less than the amount that would have been paid under the “single life” option — 6% to 25% less.
Fortunately, there is a way to both protect your spouse and retain the higher income. It’s called “pension maximization.” Here’s how it works:
- You purchase an adequate amount of life insurance coverage on yourself, naming your spouse as beneficiary. The death benefit should be enough to replace any lost pension benefits if you die first.
- At retirement, you take the “single life“ option. This way, you receive the maximum pension benefit for as long as you live.
- You then use a portion of the higher pension income you’re receiving to pay the insurance premiums.
If the cost of the life insurance is less than the amount you would have to give up to provide the equivalent benefit to your surviving spouse, the difference is yours to spend for the rest of your life. And if your spouse dies first, you can cancel the insurance while keeping the higher pension income. (Conversely, if you had selected the “joint and survivor” pension, you’d be stuck with the lower income if your spouse were to die first.) Or you can choose to keep the insurance if your spouse dies first so that you can give the death benefits to your children, grandchildren or charity.
This pension maximization strategy does not work under all circumstances. For instance, if you have health issues or life insurance is not available at a reasonable cost, then the concept may not work for you. Also, many pension benefits increase annually; this must be considered when evaluating the amount of insurance you’d need to replace your pension. Finally, some pensions provide health insurance benefits — but if the pension is terminated, that benefit is lost. So evaluate the strategy carefully. When it works, pension maximization can provide an advantage over other choices.
As with any important financial issue, consult your planner before making any decisions regarding your pension.
If pension max is an appropriate strategy for you, your planner can help you get the life insurance you need to execute it.
Editor's note: This is a continuing series from AccuQuote, Edelman Financial's insurance partner. Contact an Edelman planner to discuss your insurance needs. Working with AccuQuote, we’ll find you the best and most affordable insurance solutions consistent with your financial planning needs.
Originally published in Inside Personal Finance January 2011