This article provides an overview of pension maximization and when it should be utilized. The understanding of these instances can help anyone make a better financial decision regarding their new, or existing, policies.
- When the participant and spouse wish or need to have more flexible survivor benefit options than those provided by a qualified plan’s joint and survivor option.
- When the participant’s spouse is in poor health. In this case a qualified plan’s joint and survivor option may be an inefficient and expensive means to provide survivor benefits in the unlikely event the participant predeceases the spouse. The cost for the amount of insurance needed to provide income for the spouse who is in poor health for his or her remaining life in the event the participant predeceases the spouse “may” be less than the cost of the survivor benefit from the qualified plan.
- When the participant’s spouse has income and asset resources, such as his or her own retirement benefits, that can provide some of the spouse’s required income needs if the participant predeceases the spouse. In this case, the cost of purchasing only so much life insurance on the participant as is necessary to supplement the spouse’s other retirement income can be less expensive than the cost of the qualified plan’s survivor benefit.
- When the participant already has life insurance in place on his or her life that can provide the bulk of the surviving spouse’s retirement income needs in the event the participant predeceases the spouse.
- A pension maximization strategy is more likely to be feasible if the participant is a female. Pension benefits are computed based upon unisex mortality factors. Most life insurance policies are priced according to sex-based mortality factors. Since women still tend to live longer than men, the relative cost of survivor benefits acquired through insurance will generally be less than the cost of those same benefits acquired from a qualified plan.
Reproduced with permission. Copyright The National Underwriter Co. Division of ALM