14 May 2012 0 Comments

Pension Maximization

In my last entry I discussed using an Indexed Life Insurance policy as a way to fund for a retirement income.  This time, I’ll also be dealing with retirement, but not as a way to fund for a pension, but as a way to enhance a pension that has already been earned.

Married workers who are retiring with a monthly pension will need to make an important decision prior to the commencement of that pension.  The retiree and spouse must decide whether to:

Receive the maximum monthly pension that stops at the retiree’s  death, leaving nothing for the surviving spouse—or—

  • Receive a reduced monthly pension in order to provide some income continuation to the surviving spouse at the death of the retiree.

There is a third option; that is to elect the maximum income and purchase life insurance on the retiree in an amount sufficient to replace income to the surviving spouse.  If the premium for the life insurance is less than the reduction in pension income, this is a “no brainer”.  Of course it’s a good deal!  But even if there is no savings, this option provides other advantages.

With the reduced spouse survivor benefit, all pension income stops after both the retiree and spouse have died.  If the spouse dies before, or shortly after the death of the retiree, very little, if anything, is left for other family members.  Also, there is no way for the surviving spouse to receive accelerated payments for emergencies or special care after the retiree’s death.  Life Insurance answers both these concerns.

The questions are: what is the correct type of policy and how much insurance is needed?

The answers are:

  • No one policy is correct.  The need decreases as the retiree and spouse live into their retirement needs.  So, part of the coverage should be Term Insurance of different durations and part a Permanent Policy to cover that scenario when both husband and wife live many years past retirement.
  •  The correct amount must be calculated carefully to make sure that the surviving spouse doesn’t outlive the income.  Using annuity factors is a conservative approach.

Don’t deal with an insurance agent who tries to solve this problem with a single policy, or with just Term or just Permanent.  Ask them how they calculated the amount being recommended.

Next I’ll tell you how to avoid a huge tax bill when leaving deferred annuities to heirs.

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