How to Maximize Your Pension with Life Insurance
This blog is for those of you with a defined benefit pension plan. If you only have a 401k or the like as your only retirement plan, you do not have a pension. If you have a pension, count your blessings and begin familiarizing yourself with the available payout options. The following is a concept that you may want to consider employing to maximize the amount of money you will receive in retirement.
Anyone who is married and has a retirement account knows that they must get their spouse’s consent to name someone other than their spouse as their primary beneficiary should they pass. Your pension also allows you to protect your spouse, for a price. If you are married, you’re probably considering taking the “spousal option” (joint and survivor). This means that for a fee (a percentage of what you would normally receive by electing the full option) if you predecease your spouse, your pension would continue to your spouse for the rest of their life. Using easy numbers for me to illustrate the point, let’s say that your pension is 60% of your last year’s salary which is $100,000. Math says that you will receive $60,000 for the rest of your life at your full pension option. Should you wish to protect your spouse in the event you died before them, your employer will allow you to elect the spousal option for a charge of say 20%. This means that you will pay $12,000 a year until you die to protect the one you love. Alas, if only there a way to protect your loved one and yourself for less than what you would be giving back to your bosses.
Consider this, by taking the spousal option, you are paying a premium. However, by paying this premium, the only one being protected is your spouse. Pension maximization entails purchasing a permanent life insurance policy upon retirement to protect your spouse and save you money. Yes, I said it, life insurance that saves you money.
Let’s say a 65 year old male decides that he will get a permanent life insurance policy for $6,000 a year and instead of paying his employer $12,000 a year to protect his wife. At a standard non-tobacco rating, that $6,000 annual premium purchases $233,247 of life insurance guaranteed to age 90. The same $6,000 would buy this person $216,661 of life insurance guaranteed to age 95, if he planned on living past 90. So, if this person lived to 85, he would have paid $120,000 in premiums. By taking the spousal option, he would have forfeited $240,000 of income. Buying the life insurance in this case, saved this couple $120,000. But, I also said earlier that there are other benefits for this person, not just for the spouse.
As we all know, life doesn’t always go according to plan. Are you aware of your options in the event that your spouse predeceases you? Do you have any options? If you don’t have the step-up option to go back to your full pension from the reduced spousal option, you will forfeit all the money you were giving up to protect your spouse. Some employers will charge extra for this feature, if they offer it at all. If you purchased a life insurance policy instead of reducing your pension, you could cancel your policy and you would be receiving your full pension for as long as you live.
This scenario is an example of how the concept can work. It may not be appropriate for everyone. In this example, would $233,247 be enough for the spouse to live off of if the policy holder passed away too soon? Although there is an 80% chance that anyone turning 65 will live to age 80, life happens, and you may not want to take that chance. What should be clear here, is that life insurance premiums listed for the person in the example will not change, the death benefit will be tax-free, the policy is guaranteed to the age you choose and you have greater flexibility in determining how you spend the money you earned while keeping more of it in your pocket.
About the author: Anthony Veloso has been in the life insurance business for over 2 years. He enjoys coaching football, playing outside with his dog, and taking day trips with his wife and newly born daughter. Anthony is a strong supporter of Orphanages and Battered Woman’s shelters. He would love to put his experience to work for your family to ensure that you have the right life insurance policy. You can contact Anthony at 1-800-654-1953 or AVeloso@Pivot.com.