Choosing Your Pension Option

Nowadays, there is a lot of talk about the need to actively plan your finances to secure a comfortable retirement. Yet, many people may overlook the important role life insurance can play in protecting their retirement income.

Suppose you have the option of receiving a pension of either $3,000 per month for the rest of your life (the single life option) or $2,500 per month to be spread over the lifetimes of both you and your spouse (the joint and survivorship option). (This scenario assumes you are not interested in receiving a lump sum distribution.) For married couples, the joint and survivorship option may initially seem like the best choice, even if the monthly benefit is lower, since it ensures continued income for a surviving spouse.

Alternative Strategy

However, another strategy involves selecting the single life option with the higher monthly benefit and using a portion of that extra amount to pay the premium on a life insurance policy for yourself. This approach offers some important advantages:

• Higher Monthly Pension Benefit. You and your spouse may receive a higher monthly pension benefit during your lifetime.
• Supplemental Income for a Surviving Spouse. If you predecease your spouse, the death benefit may be used to help offset the loss of your pension benefit. While you will owe current income taxes on your pension plan distributions, death benefits are generally received income tax free, although they may be subject to estate taxes if designated for the benefit of someone other than a surviving spouse. Also, cash value or death benefit proceeds are not subject to the minimum distribution rules that are inherent to other tax-deferred vehicles.
• Cash Value Accumulation. In addition to providing a death benefit, a cash value policy can help provide a ready source of funds for emergencies or other needs. This cash value accumulates on a tax-deferred basis and can be borrowed against during your lifetime, generally at a reasonable cost. However, it is important to note that withdrawals and loans taken against a policy's cash value could affect the death benefit and may have adverse tax consequences.

Some Important Caveats

Despite its advantages, this strategy requires disciplined management to achieve the desired results. First, your life insurance policy may lapse if the premiums are not paid or if substantial cash values are borrowed and interest is not paid. Second, a lump sum death benefit must be properly managed to yield the required income. Third, by waiving the spousal provision, your spouse may lose other pension-related benefits, such as cost-of-living adjustments or company-sponsored health insurance. Fourth, the issuance of a life insurance policy is not guaranteed. You should proceed carefully with this approach until a policy has been issued in your name. Finally, the issuance of a policy at a reasonable premium (which would depend on your age and health condition) is not guaranteed. If the premium takes up too much of your monthly annuity amount, this strategy may not make sense.

Choosing the best method for your pension payout requires a careful balancing of the relative risks in the context of your individual needs and circumstances. With so much at stake, you may wish to consult a qualified financial professional before selecting your pension payout option.

Copyright © 2007 Liberty Publishing, Inc. All rights reserved. RPGLIFE8