A few weeks ago, I met with Joe and Mary. Joe had worked for the state his whole career. And at 63, he was ready for retirement.
So, Joe scheduled a meeting with his employer to discuss his pension options. At the meeting, Joe was presented with two plans.
He could choose a maximum benefit pension and receive the full monthly pension amount until the time of his death.
Or, he could enroll in a survivorship pension plan, opting for a lesser monthly amount but guaranteeing that these payments would continue for Mary if Joe were to pass away before her.
Each plan had its benefits, and each had its risks.
Joe and Mary were faced with a decision. As a loving husband, Joe wanted to make sure that Mary would be financially taken care of if he were to pass away.
What should Joe choose?
As a life insurance advisor, I sat down with Joe and Mary to look closely at their options. Here’s what we discussed.
Maximum Benefit Option
The first option Joe had to consider was what I call the Maximum Benefit Option.
The option was laid out this way. Joe could receive the maximum amount offered by his pension each month for the rest of his life.
And if something unfortunate happened to Joe in the first seven years of his retirement, his wife Mary would continue to receive the maximum benefit amount each month.
But here’s the catch. Mary would only be allowed to collect those checks for the first seven years after Joe’s retirement.
If Joe passed away seven years and one month after his retirement, Mary would not receive anything from his pension.
With the maximum benefit option, Joe would receive a higher amount each month. However, if Mary outlived him, his pension would no longer provide for her.
While this option covers the retiree for their entire life, it does not provide the same coverage for their spouse.
This is the typical breakdown of how the maximum benefit option pays out in most circumstances.
Now, Joe’s employer presented Joe with a second option. In this option, Joe could agree to take a lesser amount each month instead of the maximum amount.
In choosing this option, the company would continue to send pension checks to Mary if Joe were to pass away.
In fact, with this option, Mary would continue to collect Joe’s pension checks for the rest of her life.
However, with this plan, if Mary passes away first, Joe will miss out on the maximum payment he could have been receiving.
Before Joe made his decision, he, Mary, and I sat down for a meeting.
During our time together, we discussed a third option. I call this option the Pension Maximizer.
A pension maximizer plan uses life insurance to cover the financial gap created if Joe were to take the maximum pension amount.
Here’s how it works.
To maximize his pension, Joe would reallocate some of his money.
Joe would opt to receive his maximum pension amount and reallocate some of that money into a life insurance policy. The life insurance policy would take the place of the pension if Mary outlived Joe.
At 63, Joe still qualified for life insurance. In case you’re wondering, as long as you are free of any major health problems, you can purchase life insurance until you are 70 years old.
Joe chose to receive the maximum pension amount. Then, each month he would use some of the money from his pension check to pay for a life insurance policy.
And the amazing thing is that the cost to do this was less than the difference between the maximum pension amount and the survivorship pension amount.
It was going to cost him about $300 each month.
And the life insurance policy would provide more benefits than a pension check.
The Benefits of Buying Life Insurance to Cover a Pension Gap
A life insurance policy gave Joe and Mary more options to consider.
This life insurance policy would begin to accrue value two years after Joe purchased it. That means that he could begin to cash out his policy – taking the cash value amount at that time and using it however he and Mary wanted to.
And with a $250,000 death benefit, Mary would actually receive a greater financial amount than if she had depended on the survivorship option.
In fact, Mary would have to receive those survivorship pension checks for 35 years to collect $250,000.
Oh, and did I mention that it’s also tax-free? That’s right. The policy is a nontaxable benefit.
And one last benefit was that Joe and Mary could also leave the money from the life insurance policy to the children or grandchildren.
I’m getting close to retirement. How can I determine if a pension maximizer plan is best for me and my family?
If you’re not yet 70 and you’re nearing retirement, I’d strongly urge you to sit down with a life insurance advisor and discuss creative options to make sure that your loved ones will be cared for in the case of your death.
Like Joe, maybe you have a wife who has depended primarily on your income throughout your married life. And if like Joe, you want to make sure your spouse will be financially secure throughout the remainder of their life, you may find that life insurance is a great option to make that happen.
Pension maximization is not for everyone, but it’s important to consider before making such impactful decisions.
By repositioning your money, you may be able to provide even more for your family.
Meeting with a Life Insurance Advisor at Baily Insurance
I’d love to invite you to meet with a Life Insurance Advisor at Baily Insurance. Our team is passionate about helping people create a long-term plan that will help them enjoy financial security in their golden years.
As an independent insurance agency, we partner with the top-rated life insurance companies in our nation to provide our clients with superb life insurance options.
And because we price out every policy with a variety of companies, we help our clients find the company that will best meet their needs at the best price.
Our team can work with you to create a long-term life insurance plan no matter your life stage. Give us a call today!