5 October 2012 0 Comments

Pension Maximization: Magic Or Myth? (part 2 of 2 this week)

Some cautions with Pension Maximization

Investigating Pension Maximization years before retirement is tough because there are so many uncertainties:  When will retirement start?  Will the pension be what is promised today?  Will the worker move to another job prior to retirement?  Will there be the same spouse?  Any spouse?

So, most workers only start thinking about their pension options just before retirement. Determining a retiree’s premium for life insurance—and whether he can qualify at all—can take several weeks.  Life insurance cannot be bound until the applicant completes a medical examination and the insurance company obtains lifestyle and medical history. Pension maximization……will not work for many people who cannot qualify for low premiums.  When that is the case, the survivorship option should be elected to guarantee spousal income.  To be on the safe side, this entire process should begin no later than three months prior to the date when the retirement option must be selected.

Current policies should be reviewed.  Policies purchased earlier for family protection might be used for part or all of the insurance needed for Pension Maximization.  A good agent will assist in deciding what current policies should be kept and what ones, if any, should be replaced.  Low premiums and death benefit guarantees are the most important elements upon which to focus.

No retiring employee should make any decision on which pension option to select based on what an insurance agent tells them they can do.  Those irrevocable decisions should only be made once the insurance being used to fund Pension Maximization has been issued and paid for.

Some added benefits

When Pension Maximization works it can be magical.  Providing more spendable income without disinheriting a spouse is just the tip of the iceberg.  If a worker selects the pension survivorship option, all benefits are lost if the spouse dies first.  With Pension Maximization the life insurance death proceeds can be paid to children if premiums are continued, or the premiums can be stopped, thereby increasing spendable income to the surviving retiree.  Likewise, if the spouse survives the retiree, but isn’t in good health, the life insurance proceeds could be used to care for the spouse with any unused proceeds going to children or any other named beneficiary at the death of the spouse.  Only fixed income would have been continued under the pension survivorship option with all benefits stopping at the death of the spouse.

All married workers retiring with a defined benefit pension should investigate the potential that Pension Maximization might hold for them while being aware of the pitfalls that could turn magic into myth.  Contact a qualified insurance agent well before retirement and tell them what you want.  Give them this article and tell them this is what you are looking for.

Next Ill be looking at how a second-to-die policy might be used in situations other than for estate tax liquidity.

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