Pen Max

[ronin]

Anyone have experience or knowledge about a strategy known as pension maximization? The concept is taking the max on your pension by not opting for a survivor benefit (like 50% or whatever) and investing the difference in your max benefit from the reduced benefit on the option in life insurance. The idea is the death benefit replaces the survivor income given up on the pension, but a cash value accumulates so that if the beneficiary spouse predeceases the employee, rather than have lost that money in reduced benefits, one could surrender the policy for the cash value accumulated (shortened version of the pen max idea). Here's link to more info: Maximizing Your Client’s Pension

[Achiever51]

This is exactly what I did before I retired. My DH is five years older than I; he has several health issues and longevity doesn't run in his family, so he expects that I will outlive him.

When I was preparing for retirement, we reviewed the different options for my non-COLAd pension, including providing a survivor benefit of 50% or 100% for my husband, either of these options would have significantly reduced my monthly pension payment. While employed, I was entitled to purchase at a low rate life insurance thru my employer; this life insurance equalled 5 x my annual income, and provided a six-figure policy for my husband, as well. At retirement, I was able to convert the policy to a whole life policy without any medical examination or exclusion for pre-existing conditions. (This was important in light of my DH's medical issues.)

If I should die before my husband, he is the beneficiary of my life insurance policy (tax-free) along with my IRA, which should replace my pension ++. Our daughter is the secondary beneficiary, which gives me peace of mind that should I spend down my entire IRA, she will still get a nice inheritance.

When I talked to MegaCorp's benefits people about my plan, they told me they were surprised that more employees didn't take advantage of it.

[Moemg]

Don't forget about health care benefits for the survivor if they are tied into your pension.

[ronin]

Quote:

Originally Posted by Moemg Don't forget about health care benefits for the survivor if they are tied into your pension.

Good point. My benefits are not connected, so it's a non-issue.

Achiever, did you go to a financial planner to run the #s or straight to the insurance company and let them handle the figgerin'? I'm thinking get a fee-only CFP to analyze the situation so I have a neutral opinion when I approach the slime-covered parasites insurance reps.

[Achiever51]

Quote:

Originally Posted by ronin Good point. My benefits are not connected, so it's a non-issue. Achiever, did you go to a financial planner to run the #s or straight to the insurance company and let them handle the figgerin'? I'm thinking get a fee-only CFP to analyze the situation so I have a neutral opinion when I approach the slime-covered parasites insurance reps.

My other benefits were not connected to my pension either, so it was not an issue for me. (I did verify this with my company, and even got it in writing that by refusing survivor pension benefits I would not lose my other survivor benefits, like health insurance.)

As for the insurance piece, at first it seemed so obvious that this was a potentially good thing to follow that I was concerned I must be missing something...so I checked it out with several sources: my company's benefits staff...then a good friend on my company's in-house insurance staff...then a relative who's a CFP...and finally, the insurance company agent. We ran a bunch of different scenarios -- and came up with the amount of insurance that "felt right".

I signed up for insurance equal to 5x my final salary -- the cost of which is less than 1/4 what I'd be giving up if I had signed up for survivor benefits in my pension. If I were to die before my DH, he'd get the insurance proceeds tax free and if he invested it conservatively and were to withdraw 4% a year, he'd be replacing about 35% of my pension. We thought that would be a fair amount, given that he'd also have the benefit of my IRA and other investments. [Besides, I really wouldn't be too concerned about providing for the next Mrs. Achiever]

[ronin]

Achiever, thanks for the reply. I hope to cover a 50% replacement of my spouse's pension. It'd probably be good if the death benefit gradually declined over time as my lifespan shortened. The greatest risk is in the early years for me. I'll probably do just what you did. Check several sources, run a number of scenarios and see what looks right. It's the "have your cake and eat it too" that kind of gives me pause, but it seems like it should work.

[hogtied]

Achiever51, can you tell us what you are paying per $1000 for the whole life insurance after ER? My plan at 59 charges $49.80 annually per $1000. This seems awefully high to me. I too am now covered at 5X's salary with term insurance. If I was to convert at ER to whole life, I would only be able to purchase approx. $40,000 with the difference between my pensions single life annuity payout and the 50% survivor payout option.

[d]

this may or may not be a good idea, but the point of this is, in all likelihood, to maximize the insurance salesperson's commission, rather that your income.