Pension Income Alternative

A comfortable retirement is something to look forward to.

It's something you've worked hard for and earned. But there are a lot of decisions to be made, including one that can have an impact on the pension income you're counting on for you and your spouse. That's because with a defined benefit plan like the one provided by your employer, you must decide before retirement whether to take your full pension and expose your spouse to a loss of benefits at your death, or to take a less than your maximum benefit in exchange for providing income for your spouse in the event of your death.

Many people go into retirement without ever knowing whether or not they have chosen correctly. But the more information you have, the easier it will be to make the decision that's right for your family.

So first, consider these questions:

  • Do you know what your options are and how much retirement income you will receive?
  • If I do protect my spouse and family how much will that affect my pension?
  • Do you know the steps you can take today to ensure you receive the maximum income during your retirement years?

 

Understanding your pension options

 

Single life option.

Pension income is paid monthly for as long as you live, whether to age 60 or 106. This option pays the maximum monthly benefit or the full pension. However, at your death, all monthly payments end, and your surviving spouse and family will receive nothing.

 

Joint and full survivor option.

You and your spouse will receive a monthly benefit while either of you are alive. However, that benefit will usually be 15% - 25% lower than the income received under the single life option. All payments stop at the death of the survivng spouse.

 

Joint and reduced survivor option.

With this option, the monthly benefit is somewhere between the previous two options. While you and your spouse are both alive, initial benefits are higher than under the joint and full survivor option. Upon the death of the retiree, payments continue at a reduced level, typically 50% of the initial benefit. All payments stop at the death of the surviving spouse.

Faced with these choices, many people select one of the two joint and survivor options in order to provide an income for their spouse. In fact, by law, these are the options offered automatically to married retirees, and before another option can be selected, both spouses must agree in writing. However, by choosing a joint and survivor option, you will be forced to accept a lower monthly income a "cost" that may be significant if you both live for 15 years or more after retiring.

 

Potential problems with joint and survivor options: 

  • If the non-retiree dies first the retiree might be locked into a joint and survivor's option's lower benefit.
  • If both you and your spouse live a long life, you will have needlessly taken a reduced income for many years - and will have received little extra benefit.
  • If you and your spouse die within the same timeframe, your entire benefit will have been lost, and the rest of your family will receive no monthly payments.
  • If the retiree dies before they actually start drawing a pension income, the survivng spouse may receive little or no monthly benefit.

 

The Pension Income Alternative Using Life Insurance: a welcome alternative.

Fortunately for most couples, there is another option: Pension Income Alternative Using Life Insurance. By leveraging personal life insurance, a retiree and spouse are able to get the most income available out of an insurance plan.

Here's how it works:

  • The retiree purchases life insurance prior to retirement (the earlier the better) and names their spouse as the beneficiary.
  • At retirement, the retiree chooses the single life option - and begins receiving the highest monthly income benefit.
  • If the retiree dies first, the spouse's income continues in the form of insurance proceed from the policy's death benefits. These proceeds can be annuitized - with income benefits guaranteed for life.
  • If the spouse dies first, the single life option benefits will continue to be paid to the retiree. The life insurance policy can be cashed in, or the beneficiary can be changed.
  • If the proposed retiree dies before retirement the survivng spouse can still inact this program to receive monthly benefits as if they had already began receiving benefits.

 

Life insurance: the key to this option:

By providing an income tax-free death benefit,1 life insurance can help meet the financial needs of your spouse or other beneficiaries at the time of your death.

Pension Income Alternative Using Life Insurance offers many benefits including:

  • Highest Monthly Pension Income: You, as the retiree, can receive 100% of the pension benefit you've worked so hard to acquire, while supplementing the surviving spouse's income with life insurance proceeds.
  • Income Tax-Free Death Benefit: Life insurance proceeds are received income tax-free by your beneficiaries1.
  • Funds For Your Survivng Spouse: Since Life insurance benefits can be received as a lifetime annuity, your spouse may elect lifetime income after your death.
  • Premium Payment Options: If properly funded, the number of premium payments can be reduced and even completely paid off before reitrement even begins.
  • Funds If Your Spouse Dies First: Because life insurance policies include cash value, the policy can be cashed in (for the surrender value) if your spouse dies first. Or the policy may be continued with a new beneficiary.
  • Added Flexibility: With life insurance, it's possible to rename your beneficiaries, or name contingent beneficiaries. This generally is not possible with pension benefits.

1Life insurance proceeds are genereally excludable from the beneficiary's gross income for income tax purposes. There are a few exceptions, such as when a life insurance policy has been transfered for valuable consideration.

 

How to know if the Pension Income Alternative Using Life Insurance is right for you.

It's important to remember that there is a cost (a premium) associated with purchasing a life insurance policy. Other factors that need to be taken into consideration are the ages of both you and your spouse, your health status, your actual pension benefit, and associated costs. Because life insurance premiums are based primarily on your age and health status, the younger, and healthier you are when you make this decision, the lower your rates will be. However, this option may still work for you even if you are near retirement.

 

The Process

Please contact us through either this website or by calling at which point we can immediately begin reviewing your situation or schedule a time that is suitable for you which can include evenings and weekends, the initial interview process will generally take between 45 minutes to an hour, at which time we will review the following:

  • A review of all pertinent data, - naturally, all this information remains strictly confidential.
  • Information that you may have on your exact pension plan, we may need your permission for the plan administrator to release information on your pension policy if you do not have it available.
  • Any other financial goals or agenda's that you may want to achieve and time frames in which you wish to achieve them.

After the initial conversation we will put together a complete plan for your review, this can take between 3-10 business days depending on how complex your situation is, and if we need to acquire information from the plan administrator and how quickly they get information to us. At that time we will call and schedule a second appointment to review the plan with you and your spouse as by law they will be required to sign off any pension decisions. The second appointment will take generally an hour or so. Here are some of the things that will be included in the plan:

  • Estimate of your benefits with all options shown.
  • Cost-of-living adjustments after retirement.
  • Social Security integration.
  • Continuation of survivor health insurance benefits.
  • Life insurance options.
  • Fixed and Variable Annuity options.

Every situation is unique. Electing the single life option and purchasing life insurance as an alternative means of providing for your surviving spouse is an involved decision. After we have went through and reviewed your position you should get a second opinion from your tax advisor or employee benefits counselor. If at that point you decide that the Pension Income Alternative Using Life Insurance is right for you and your family we can immediately get things underway to get you and your family protected.

So please give us a call 7 days a week at (989) 401-5350, or email us at diversifiedgroup@diversifiedgroup.net, to schedule an appointment and to find out if the Pension Income Alternative would be the right choice for you. Thank you.