Potential Benefit Loss Over 20 Years
You face a tough dilemma if you're in line for a pension at retirement. It could cost you and your spouse thousands of dollars and take a big chunk out of your children's inheritance.
It's called the "pension dilemma," because you may end up making a trade-off on your pension-deciding whether to take your full pension benefit and expose your spouse to a loss of benefits at your death, or taking less than your maximum benefit in exchange for continuing benefits after you die for your spouse.
Fortunately, for many couples, there is another alternative. It's known as pension maximization.
But first, the pension dilemma: As an example, let's say you'll be eligible for a $3,000 monthly pension benefit at retirement. That's the value of your benefit and the amount you will receive under the "single life option."
The only problem is that your benefits will be paid only as long as you live. At your death, your pension benefits die with you. That's fine if you're single, but not if you're married. Should you die first, your spouse not only loses you, but also $36,000 a year in income.
That's why, if you're like most married people, you will select a "joint and survivor option," which pays benefits as long as either of you is alive. Since your spouse has a legal claim to your benefits, this is the option automatically offered by law to married retirees. Before you can elect another option, you must both agree in writing.
However, your joint and survivor benefit payments will be less than those under the single life option.
Though the actual number depends on various factors, a single life $3,000 monthly benefit could be reduced significantly. For the sake of discussion, if a "joint and full survivor option" is selected, that "single life option" benefit of $3,000 could be reduced by as much as $600.
That adds up to $7,200 a year in lost benefits-$72,000 over a ten-year period.
Pension Maximization
Alternative
There is another alternative-pension maximization. The concept is fairly simple:
1. Purchase a sufficient amount of permanent life insurance on yourself prior to retirement, naming your spouse as beneficiary. The death benefit is informally earmarked to replace the lost pension benefit if you die first.
2. At retirement, you and your spouse opt to take the single life benefit option-receiving your maximum pension benefit for as long as you live.
3. Use a portion of the additional pension funds-the difference between the amount for a single versus a joint and survivor benefit-to pay the life insurance premiums.
In order to get an idea if this alternative would work for you, you should first check with your pension plan administrator and find out about your projected benefits under the straight life option. Then ask what the decreased amount will be each month to add your spouse under a survivorship option. Then ask your New York Life agent, at no cost or obligation to you, to show you a personalized life insurance illustration.
The amount of premium required to keep the policy in force should be no larger than the difference between the amount for a single versus a joint and survivor benefit.
Additionally, if the illustration shows out-of-pocket premium payments ceasing because dividends are being used to fund the policy, keep in mind that the premium is due throughout the life of the policy, until the insured dies. Therefore, if the dividend scale, which is not guaranteed, is reduced, additional out-of-pocket premiums will be necessary in order for your spouse to obtain the proceeds at your death.
An extremely critical issue to determine is whether or not your pension plan requires you to select the joint and survivor option in order to continue post-retirement medical benefits. You may not wish to pursue the pension maximization alternative if it means your medical coverage will cease.
However, if you chose to proceed with the purchase of life insurance under the pension maximization alternative, keep in mind that life insurance rates are based primarily on age. So, the younger you are when you make this decision, the lower your rates will be.
But pension maximization may also work even if you are at or near retirement. The idea is to use a portion of your full pension benefit to pay the life insurance premium. The result can be a win-win situation for you, your spouse, and your heirs.
Here's why:
1. You receive the maximum pension benefits to which you are entitled.
2. Should you die first, even though your pension stops, your spouse's income continues in the form of insurance proceeds. In fact, if you like, these insurance proceeds can be set up as an annuity-with income benefits guaranteed for life.
3. Should your spouse die first, your benefits will continue. The life insurance can be surrendered or the beneficiary changed.
4. Should your spouse die first, and you maintain coverage with a new beneficiary, cash values accumulate in your permanent life insurance policy. If you live well into your golden years, the life insurance can help protect other assets for your heirs. In fact, no matter what happens, your estate can be protected, enabling you to pass the policy proceeds on to the named beneficiary which you select. For example, you could name your children, grand-children, or a favorite charity as beneficiary(ies).
Is Pension Maximization Right for You?
That depends. As previously discussed, there are many factors that need to be taken into consideration, including both your ages, health status, actual pension benefit, the terms of your pension plan, and costs. Still, you owe it to yourself and your spouse to find out more.
New York Life: The Company You Keep®
Since 1845, New York Life Insurance Company has been providing quality insurance products to individuals, families, and businesses. For more than 160 years, we have conducted our business around the central values of financial strength, integrity, and humanity-and have remained committed to being a mutual company, owned solely by our policyholders.
This means that, regardless of the economy, our focus is fixed on just one objective: meeting the needs of our customers, now and far into the future. Talk to your New York Life agent today and find out why we are The Company You Keep®.
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