If you’re relying on your pension to help cover expenses for you and your spouse once you retire, you may be tempted to elect for a lower pension in exchange for continued pension payments to your surviving spouse after you die.
Most companies will offer that option (known as Joint & Survivor), and it may seem the prudent course. But in many cases, you can safely select the other option—higher pension payments that end when you die. This option (known as Life Income) can still provide security for your spouse through the use of a pension maximization strategy utilizing life insurance.
No Small Difference Between Options
The gap in pension payments between the two options is usually significant. If you decide on the Joint & Survivor choice, your pension payments typically will be 10% to 35% less than if you go with the Life Income option. With today’s longer life expectancy, that can add up to a lot of dough!
Using a pension maximization strategy, you pick the option that pays the maximum pension, while you take out life insurance to provide for your spouse upon your death. The life insurance makes this strategy work—without it, your spouse could end up without enough financial resources if you pass first. (In fact, your spouse has to sign off on the Life Income option for this very reason.)
But with adequate life insurance, a pension maximization strategy can put more money in your pocket immediately after your retire—and hopefully for years to come.
Other benefits of a pension maximization strategy include:
- If you die first, the life insurance death benefit your spouse receives won’t be taxed, unlike taxable pension payments that continue after your death.
- If you die before you retire, your spouse will get the death benefit.
- You can change your life insurance beneficiary whenever you want.
- Certain policies build cash value, which you can access in emergencies.
- If your spouse dies first, you can cancel the life insurance policy. Or you can hold on to the policy to benefit other heirs or charity.
Does A Pension Maximization Strategy Make Sense For You?
When considering a pension maximization strategy, you should consult with an independent life insurance agent with experience in helping people benefit from this strategy. An independent agent can help you consider important factors in determining what will work best for you, such as:
- How much your life insurance premiums will be.
- What average life expectancy is.
- Other financial resources (e.g. a separate pension benefit) your spouse will be able to rely on if you die first.
- The amount your spouse will need to maintain the same standard of living if you die first.
- The type of insurance that best fits your situation. (There are a wide variety of term and permanent policies to choose from—each with pros and cons.)
- Debts you have (e.g. a mortgage) that must be figured into the picture.
The Bottom Line
A pension maximization strategy can allow you to protect a surviving spouse while providing more money for living while you’re alive.
You need to carefully consider the pros and cons of the strategy before deciding which pension option you should chose.
An independent life insurance agent can help you determine if pension maximization is the best strategy for you.