Pension Maximization

Senior Couple Meeting With Financial Advisor At Home And Smiling
Pension Maximization is a strategy to help get the most out of defined benefit pension plans for married couples. With this strategy, a life insurance policy is purchased on the life of the plan participant prior to retirement. It may be purchased closer to retirement, but because of age and possible health issues, purchasing the policy sooner may be in the client’s best interests.

Defined benefit pension plans do a much better job when it comes to taking care of the retiring employee than they do taking care of the retiree’s potential beneficiaries. In almost all cases, the named beneficiary cannot be changed after benefits have begun, and if the beneficiary predeceases the retiree, the reduction in pension benefit is permanent. By taking a few simple steps, your defined benefit pension plan can become a tool that helps your spouse, while helping protect you AND potentially your children as well!

The participant’s spouse is named as the beneficiary of the life insurance policy. The life insurance policy’s death benefit would seek to match an amount that would replace the benefits for the surviving spouse as if the Joint & Survivor benefit option was selected. At retirement, the plan participant selects the Life Only benefit option in order to receive the largest possible benefit amount. The participant will use the increased pension benefits to pay the premium of the life insurance policy. When the plan participant dies, a guaranteed benefit is paid to the spouse, generally income tax-free. The benefit can then be used to replace the lost pension income as a result of the plan participant’s death. If the beneficiary predeceases the retiree, the beneficiary on the policy can be changed to the children, or the policy can be cashed out. In that case, no further premiums would be required. This effectively elevates the retiree back to the Life Only option payout. Pension maximization can be a strong strategy with teachers, federal government employees, state & municipal employees, and with employees of companies with a defined benefit pension plan. Consider the strategy for married individuals who participate in defined benefit pension plans and are comfortable using a portion of their pension benefit to fund a personally owned, guaranteed vehicle.

BENEFITS

Maximum pension income. By selecting the Life Only option, the plan participant receives a larger benefit. Should the spouse die first, the participant isn’t left with a reduced benefit if they chose the Joint and Survivor option. Under this scenario, the participant may also access their cash values to further help supplement retirement income.

Benefit for plan participant’s spouse. When the plan participant passes, the spousal beneficiary receives the benefit generally income tax-free, which replaces the discontinued pension income.

Possible inheritance for heirs. If the spouse predeceases the plan participant and the guaranteed vehicle is kept in force until the plan participant’s death, they could change the beneficiary designation to their heirs, and the plan’s death benefit would pass to them.

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