If you have a defined pension plan when you retire, you will be faced with a critical decision. You will be asked to decide whether it’s more important to have higher monthly pension benefits or to continue benefits for your spouse if you die first.
In exchange for higher benefits now, will you agree to let your pension end upon your death?
The question doesn’t have to be that hard. Life Insurance can provide the answer.
Larger checks, greater flexibility, better protection
Pension maximization using life insurance is a strategy in which you take the higher pension benefit and then provide the security you want for your spouse through life insurance instead of the pension.
Not only does this mean higher monthly pension benefits, life insurance can offer better protection and flexibility for several reasons, including:
1. If your spouse dies first, you can lapse the insurance policy, or you could keep the policy to benefit other heirs or charity.
2. If you die first, your spouse can receive the life insurance death benefits tax free, whereas pension benefits are generally considered taxable income.
3. If you die before you retire and you have already begun your pension maximization strategy using life insurance, your spouse will still get full insurance death benefits. Company pension plans vary widely on how they provide pension benefits (if any) to surviving spouses.
4. If circumstances change, you can name a new beneficiary of your life insurance policy.
Crunching the numbers
Of course, life insurance costs money, so you must weigh the cost of the policy against the increase in your pension. In this calculation, you must consider life expectancy. The longer your life expectancy, the more value the higher pension benefits will hold and the less expensive your insurance policy will likely be.
And there are other financial considerations, as well. Each family’s specific situation affects the decision of whether pension maximization using life insurance is the right strategy. Debt, taxes, estate planning, expected future income—all of these and more can enter into your calculations.
One crucial aspect of making the right choice about your pension is to know what your insurance rate will be. Age, health history, lifestyle, and other factors can significantly affect how you are rated. Before deciding to pursue pension maximization using life insurance, you need to speak to an independent life insurance agent so you have an idea what your insurance will cost for your projections. This is too important a decision for guessing.
The bottom line
But in general, if you can afford the premium payments now, pension maximization using life insurance makes sense. Particularly if your surviving spouse will have other income—such as his or her own pension—pension maximization using life insurance is an attractive option because you won’t need as much coverage.
An independent life insurance agent can help you calculate the cost of a life insurance policy versus the benefits of taking the maximum pension. An independent agent can also advise you on which type of insurance policy to buy that best fits the strategy you choose.