Help your clients maximize their pension benefits
Instead of electing a reduced pension benefit that pays over the lives of both spouses, your married clients can choose the maximum pension benefit (a single life payout) and provide for the financial needs of their spouse using life insurance.
How does this strategy work?
When your clients work for a company that provides a pension benefit, they will need to choose between payments for one person or for both spouses. Payments for one are larger, but cease at the retiree’s death. Payments over the two lives of the couple are smaller, sometimes significantly smaller. Instead of reducing their benefits to ensure that both spouses have the money they need at retirement, your clients may want to consider a technique called “Pension Maximization.” It allows your clients to maximize their pension benefits and helps provide financial independence for the surviving spouse through a life insurance policy’s death benefit.
Strategy in action
- Bill and Karen are both 60 years old and five years away from retirement
- Bill participates in his current employer’s pension plan and would receive $3,000 per month at retirement if he chooses the life-only option. However, once he dies, the benefit stops. If he chooses the joint and survivorship benefit, he and Karen would receive $2,000 per month for as long as one of them is still living.
- Their financial professional recommends the Pension Maximization strategy. Bill takes the life-only $3,000 per month payment, but uses a portion of it ($7,870 per year) to purchase a permanent life insurance policy on Bill’s life.
- If Bill passes away, Karen can take the lump-sum life insurance benefit ($338,000) that she could use to generate income for herself through potential monthly withdrawals.
- If Karen passes away before Bill, he can surrender the policy or use it to pass assets on to their children.
- 55-60 years old with a defined benefit pension plan
- There is a significant difference in the single- and joint-life benefit amounts for the pension
- Is healthy and can qualify to buy a permanent life insurance policy
- Only a portion of the single-life pension benefit is needed
- The employer doesn’t provide any other valuable benefits hinging on the election of the joint-life option (sometimes spouses can get medical benefits too, if the joint-life pension option is elected)
Please remember that cash value life insurance does have many other considerations your clients should review carefully before selecting a life insurance policy, and please keep these important points in mind:
- If clients do not keep paying the premium on a life insurance policy, they will lose substantial money in early years.
- To be effective, clients need to hold the policy until death. A life insurance policy generally takes years to build up a substantial cash value.
- Tax-free distributions will reduce the cash value and face amount of the policy, and clients may need to pay higher premiums in later years to keep the policy from lapsing.
- Clients must qualify medically and financially for life insurance.
- Generally, there are many additional charges associated with a life insurance policy including but not limited to a front-end load monthly administrative charge, monthly segment charge, cost of insurance charge, additional benefit rider costs, and surrender charges.
Documents to view or email to clients
Financial Professional materials
The policy premium and death benefit amounts used for this case are intended only to help demonstrate the planning concept discussed and not to promote the sale of a specific product. The rates are broadly representative of rates that would apply for a policy of this type and size for Insureds of good health in the ages mentioned. If different rates were used, there might be significantly different results.
Please be advised that this document is not intended as legal or tax advice. Accordingly, any tax information provided in this article is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer. The tax information was written to support the promotion or marketing of the transaction(s) or matter(s) addressed, and your clients should seek advice based on their particular circumstances from an independent tax advisor. Neither Equitable nor its affiliates provide legal or tax advice.
As this sales approach could be applied in connection with either the sale of a product to fund an ERISA qualified plan, or distributions from retirement accounts (as defined by the Department of Labor’s (DOL) Fiduciary Duty Rule), it may be subject to, or otherwise fall within the context of that rule. Accordingly, you must ensure that any action you take pursuant to this sales approach fully comports with all aspects of the DOL's rule, as determined and approved by your firm's legal, compliance and supervisory policies, procedures and protocols.