Pension maximization involves using excess income from a single life annuity to fund a life insurance policy, which provides a retirement income for the surviving spouse. However, drawbacks include insufficient funds for the policy and potential cancellation if the younger spouse dies first. Couples should carefully evaluate their options and consult with an insurance agent.
Pension maximization is a recommended retirement planning technique for some retiree couples, depending on their circumstances. People who choose this option have a single life annuity for the older spouse, reserving part of the annuity proceeds to fund a life insurance policy. When the older spouse dies, the life insurance is used to provide a retirement income for the younger spouse. Individuals considering this option should review their options carefully and ask an insurance agent for a detailed breakdown of available retirement fund options.
The idea behind pension maximization is that when people select a single annuity, rather than a joint annuity with survivor benefits, the monthly income from the annuity is higher. The couple can set aside the additional income from the annuity to pay for the life insurance policy, and survivor benefits will be greater with life insurance than they would be in the annuity. On the surface, pension maximization may seem like a good idea for couples preparing to retire.
There are some drawbacks to the plan that need to be considered. In some cases, the excess of the annuity may not be enough to finance an adequate life insurance policy. Setting up such plans for soon-to-retire couples may also not be in their best interest because there may not be enough time to fund the annuity. If the younger spouse dies first, the life insurance policy may be cancelled, but payments already made cannot be recovered and represent a loss to the surviving spouse.
When evaluating retirement options and thinking about pension maximization, it is wise to ask a life insurance agent for a breakdown of costs and benefits for using this tactic versus assuming a joint annuity with survivor benefits. Couples may also want to consider their age, close to retirement, and general level of health, as these can all be factors in choosing the best way to finance retirement. Another problem can be the benefits offered through a workplace, since it is not always possible to choose the payment format for retirement benefits.
People who choose pension maximization must ensure that their contracts with the insurance company are detailed and complete. They should check for possible problems in the contract, including circumstances in which the life insurance policy will not be paid. If one of these situations arises, the surviving couple may not be able to receive benefits and may run out of retirement funds.
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