For those who are lucky enough to work for a company that offers a traditional pension plan, finalizing your pension options can be an extremely nerve-racking when nearing retirement.
Aside from the lump sum vs. lifetime conundrum, whether you choose the single life benefit or the spousal benefit will have the largest impact on your payout. But, many people don’t realize amid these high-stakes decisions that they don’t necessarily have to accept a diminished payout to protect their spouse. A strategy called pension maximization allows you to supplement your full payout with life insurance. In some cases, you might even secure more protection with life insurance while paying less in premiums than the dollar figure you would be forfeiting with the survivor benefit.
In this article, we’ll first provide some context on the current state of pensions in the U.S. Then, we’ll help you measure the balancing act that is pension maximization and execute a viable pension maximization strategy.
Quick Article Guide
1. How a Pension Plan Works
2. The Decline of the Pension
3. An Introduction to Pension Maximization
4. The Advantages of Pension Maximization
5. Insider Rates
6. The Key: Start Early
7. The Wild Card: Your and Your Spouse’s Health
8. Work with an Independent Agency
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A pension is a defined-benefit retirement account in which an employer contributes a fixed payout during an employee’s retirement. Upon retiring, the employee typically has three main options:
- Accept the full pension over their entire lifetime with no survivor benefit. This means that when they die, any money left in the account dies with them.
- Take a reduced payout to add a spousal benefit (also referred to as a joint benefit or survivor benefit). In this case, the surviving spouse receives the pension income in the event the pension holder dies.
- Take a further reduced payout in exchange for a single lump sum.
There are intricacies to each of these payouts, but we’ll keep everything as simple as possible for purposes of this discussion.
In the 1980s, pensions were the most popular type of retirement plan in the U.S. But, over the past few decades, employers have shifted to the 401(k) as their preferred retirement benefit.
Bankrate.com notes an eye-opening stat from the Employee Benefit Research Institute (EBRI): In 1979, twenty-eight percent of all workers were enrolled in defined-benefit plans. By 2012, that number had dropped to three percent.
“The reason is simple,” writes Ryan Guina for US News. “Employers are shifting the burden of retirement from their company to the individual.”
With employers less inclined to hand out long-term retirement payouts and employees less trusting of corporate financial stability, the pension has become a cut-throat, “take it or leave it” deal.
Naturally, accepting a reduced payout can be a tough pill to swallow, even when it’s to protect your spouse from potential financial hardship after your death. To make the decision even more stressful, once you make your choice, you can’t go back and alter your pension down the road. If you take the spousal benefit and your spouse dies, or if you get divorced, the money you gave up is for nothing.
Is there a way to get the protection you need for your spouse without sacrificing money from your hard-earned pension? Enter life insurance for pension maximization.
When the numbers run in your favor, you can accept your full pension, and then buy life insurance in place of the spousal benefit. For example, if your full pension pays $4,500 per month, taking the spousal benefit might drop your payout to $3,400 per month.
Life insurance, on the other hand, can provide the same peace of mind and perhaps even a larger death benefit for, say, $350 per month. By accepting your full $4,500 per month pension and buying life insurance separately, you are putting $750 more in your pocket each month ($9,000 per year) compared to the spousal benefit.
JRC is an independent life insurance agency, we help drive success stories like the example above, in real life, on a daily basis. We even work with a few life insurance carriers that offer 20 to 50 percent lower premiums for electing to have your death benefit paid out over time rather than as a lump sum.
Pension maximization is not only viable; many couples actually prefer it over the spousal benefit for reasons other than pure mathematics. Why?
- A life insurance benefit is 100% tax-free, while pension income is subject to income tax. (Remember this when comparing the two. For example, if you have a $100,000 pension spousal benefit and a $100,000 life insurance death benefit side by side, the pension payout becomes more like $70,000 after taxes, while the life insurance payout holds at $100,000.)
- A life insurance death benefit is paid as a lump sum. The only way to get a lump sum with a pension is to accept a greatly reduced payout.
- Money from life insurance is generational. A pension with a spousal benefit is void after the spouse dies.
- You have more leniency to adjust or cancel your life insurance coverage if your needs change. There is no going back on your pension decision.
The chart below shows actual rates quoted in August 2016 for:
- Males ages 50, 55, 60, 65, 70, and 75
- Term life insurance (10 years, 15 years, 20 years, 25 years, 30 years)
- Term life insurance with a Return of Premium (ROP) rider (more on this after the figures)
- Guaranteed universal life insurance to age 90
- Guaranteed universal life insurance to 95 and 100 with a ROP rider
- Death benefits of $100k, $250k, $500k, $750k, and $1 million
Rates For Healthy Male Age 50-75 Term Life Insurance (10 Years – 30 Years)
Rates for Healthy Male Age 50-75 With a ROP Rider
Rates for Healthy Male Age 50-75 With Gul Insurance to 95 and 100 With a ROP Rider
Rates For Healthy Female Age 50-75 Term Life Insurance (10 Years – 30 Years)
Rates for Healthy Female Age 50-75 With a ROP Rider
Rates for Healthy Female Age 50-75 With Gul Insurance to 95 and 100 With a ROP Rider
These numbers provide a starting point for you to begin weighing the cost of life insurance vs. the cost of the spousal benefit on your pension. Rates for females are typically lower.
A ROP rider enables you to receive your premium payments back (without interest) if you do not die within your policy’s term or age limit. As the chart shows, this is somewhat of a luxury that can significantly increase term life insurance premiums.
In guaranteed universal life insurance policies, ROP functions a little differently, as you might get half of your money back by surrendering your policy at your 15th year policy anniversary , or all of your money back by doing the same between the 20th and 25th anniversary. There are some rules and caps that apply which is why we recommend speaking with us to better understand the options. Nevertheless, ROP is certainly an option to consider if you can afford it.
Shopping for life insurance takes time, as does finalizing a policy. If you’re considering life insurance for pension maximization, we recommend you start shopping around at least 90 days in advance—180 days would be even better.
You don’t want to be in the middle of applying for life insurance when your pension decision date arrives, because then you will likely be forced to accept the reduced payout in order to get guaranteed protection for your spouse. Or worse, you might accept the full payout and find that life insurance is not affordable, leaving your spouse with no protection.
As is the case with just about any life insurance policy of value, your overall health is the single most important determining factor in your premium. If you are in good health, you will likely find pension maximization to be a winning strategy. Unfortunately, being in poor health or having a chronic illness can severely limit your ability to find affordable life insurance, which in turn negates the cost benefits of pension maximization.
The health of your spouse can also affect your pension maximization strategy. If your spouse is significantly younger than you and in good health, you need a larger policy with a longer duration. If they are in poor health, a policy with a shorter duration might make more sense.
Agents in busy call centers are typically stretched too thin to provide the patience and white glove service pension maximization requires. These agents are limited to only a handful of life insurance companies and trained to crank out straightforward vanilla policies allowing them to achieve their daily sales quota.
At JRC, our agents do not have sales quotas, our clients are our top priority.
As an independent agency focused solely on meeting the needs of our clients, JRC Insurance Group can provide the expertise and dedication you need in order to execute a life insurance strategy in synchronization with your pension. Click the button below to get a free life insurance quote, or give us a call at 855-247-9555 to speak with one of our agents. Our agency is owner-operated and all of our agents have multiple years of experience with life insuran