How Insurance Can Increase Your Pension Income

Also Known As Pension Maximization

The Problem

At retirement, married pension plan participants are required to make a choice. They can:

A. Take the maximum monthly income for the life of the retiring employee only (e.g., $1,000 per month); or

B. Take a substantially reduced pension for the lifetime of both the retiring employee and his/her spouse (e.g., $800 per month).
In the absence of any planned alternatives, most employees and their spouses feel compelled to take the reduced life income at retirement.
Unfortunately, once this option is selected it may not be changed.
Consider The Potential Costs

A. If spouse lives but a short time, the surviving retiree faces a lifetime of reduced pension benefits.

B. If both live a full life and die within a year or so of each other, little benefit is ever realized after 20 years or more of reduced pension.

C. In no case do children or other heirs realize benefits.

Conclusion

Pension survivorship options equate to very expensive term life insurance which may never pay a benefit.

A Solution

Purchase permanent life insurance prior to or at retirement in an amount that would provide the survivor or other heirs with a similar income benefit.
Then still take the maximum monthly pension benefit.

Caution: In some cases, eligibility for continuing surviving spouse’s group health care is dependent on survivor option election.

The following examples illustrate the potential cost of the survivorship benefit over the life expectancy of the retiree and his or her spouse.

Alternative Funding

Purchase a permanent life insurance policy in an amount that will provide a death benefit for the spouse to replace the income that might have been received with the survivorship option. For example, to provide $800 per month for 25 years (assuming an 8% growth rate on the remaining balance) would require an initial sum of approximately $104,000 ($64,500 for 55% survivorship benefit) of death benefit. Of course, the 8% return is not guaranteed, so, if desired, a lower rate of return or a longer payment period could be used to arrive at a more conservative amount.

Advantages To Alternative Funding

A. Premiums can be paid before retirement from discretionary income.

B. The monthly premium may be more or less than the difference in the monthly retirement benefit, depending on the insured’s age and health at the time a life insurance policy is issued. However, in general, the overall cost of the life insurance will be less than the total potential cost of lower pension benefits if the insured lives to normal life expectancy.

C. A large part of the death benefit proceeds payable in monthly instalments will be income tax free. Normally, pension income is fully taxable.

D. If the retiree and spouse die simultaneously or if the spouse dies first, their children or other heirs may receive the insurance death benefits. Typically, no additional benefits would be payable from the pension plan. If the spouse dies first and the retiree does not have any other beneficiaries deserving of the proceeds, the retiree can surrender the policy for its cash surrender value.