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If you have a pension, wow, you are one of very few who has one these days. Now, you want to get the most out of your plan. If you are single, this is the option you would take. You need to read no further for yourself. Do you want to be able to pass your pension onto your spouse if you die? If you said, "yes" then you will want to consider Pension Maximization.
Let’s say your Full Retirement benefit (Option 1) is $2,000 per month. The good part about Option 1 is you get the maximum benefit from you pension for the rest of your life. The bad part is, when you die, no one receives any part of your pension. Great while you are alive. But devastating for those left behind who would need that income.
The Survivor Option, we’ll call Option 2, is a reduced amount from Option 1. Let’s say the Option 2 amount is $1,500. You, as the retiree, would collect the $1,500 per month for the rest of your life. When you die, your spouse would collect the $1,500 per month for their lifetime. When they die the plan is over. The good part about taking Option 2 is your spouse is guaranteed a lifetime income that you were earning before you died. No financial disruption. The bad part of choosing Option 2 is what happens if your spouse predeceases you? You now will be receiving the reduced amount $1,500 vs. $2,000 for the rest of your life. And, in most pension plans, once your spouse dies you cannot choose another beneficiary.
Let’s come together on a common ground here. Any pension survivor verbiage is going to say something similar to “When a member chooses a survivor option, it can be described as a life insurance policy, which guarantees a definite monthly payment of over the lifetime of two individuals. The reduction in the monthly benefit agreed upon at the time of retirement, (the difference in the payment from Option 1 to Option 2) can be considered the premium paid for this insurance.”
Now that we can agree that you are purchasing a life insurance policy on your survivor benefit, the question is whether you are better off taking the survivor option with the pension plan, or taking Option 1 and purchase a life insurance policy on yourself outside of the pension. This is where you need me to help you. I will run the numbers and ask you qualifying questions to determine if Pension Maximization is the best option for you and your spouse.
Here are your choices. Under what I am calling Option 2, the survivor benefit through the pension, you are paying a life insurance premium with only one choice of beneficiary. If that beneficiary dies before you, you still need to keep paying the premium (receiving the lower monthly income) for which no one will ever receive. Or have flexibility by purchasing a life insurance policy that will provide your spouse with the same income the survivor option would at a potentially lower, fixed cost. I call that Option 3.
When you choose Option 3 you purchase the life insurance BEFORE you retire, to make sure you qualify for the coverage. Then with your plan in place, you choose your retirement option. You will choose Option 1, the maximum amount through your pension plan. If you, the member die first, the tax-free life insurance proceeds will provide a lifetime income for your spouse, just like the survivor option through your pension. Since the plan is private you can design the survivor amount to be what you want it to be. If your spouse predeceases you, you, the retiree would then receive the maximum income from your pension plan. Now you have a life insurance policy on your life. Here is where your options with your private life insurance policy come into play. You can choose to keep the policy and name new beneficiaries. Or you can cancel the policy and get any cash value that may be in the policy. In the end, you have received the highest benefit pay out from your pension.