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Please weigh in on this investment strategy
Old 07-22-2014, 07:51 AM   #1
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Please weigh in on this investment strategy

Couples who qualify for an employer pension need to make a big decision before they retire. We are one such couple. Should we take a life-only annuity, which provides the highest monthly payout but ends when the pensioner dies? Or choose a joint-and-survivor benefit, which offers a lower payout but one that continues after the retiree dies for as long as the spouse is alive?

If the employee due the pension is likely to die first, the joint pension is usually the best route. But some insurance agents may try to steer you to a strategy known as "pension maximization." It works like this: Take the higher life-only payout and use all or part of the extra income to buy life insurance. If you die first, your pension ends but your spouse will get a death benefit that supposedly will be enough to generate at least the same income she would have received under the joint pension. If she dies first, you cancel the insurance and continue to take the higher payout.

For example:
Under pension max, the worker chooses the life-only benefit with its extra $799 a month. He uses $660 a month to pay premiums on three life insurance policies -- a 10-year $200,000 term policy, a 20-year $200,000 term policy and a $370,000 universal life policy. He qualifies for low rates because he is healthy. (This won't work unless the client is a better-than-average healthy non-smoker.)
If the husband dies after 22 years, the 81-year-old wife could use the tax-free $370,000 death benefit to buy a fixed-payout annuity. At today's rates, the annuity would pay out $3,388 a month. That's lower than the joint pension's $3,557. BUT...
With the pension, payments would be fully taxable and, at the 15 percent rate, would leave the widow with just $3,023 of after-tax spending money. With the annuity, most of each payout would be tax-free return of investment so, with insurance, the widow would have more spendable cash.
But there's risk, and here's one scenario:
If the husband lives longer, "he will have to buy term life insurance in his 80s, and that will be phenomenally expensive. Some strategies use insurance with death benefits that grow based on market assumptions. If the market grows at a lower rate, the death benefit could be too low to cover the survivor's expenses.
What are your comments? We'd love to hear them. Thank you!
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Old 07-22-2014, 08:37 AM   #2
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The insurance sounds like a great deal for the insurance agent. I've seldom seen the best financial choice involving an insurance company. I'm only interested in insurance where I can not afford the risk so I only have auto, home and liability insurance. I have big deductibles for the auto and home.

If both of your health is good, you're probably better off with the straight pension with the joint-and-survivor benefit. That's what DW and I will be doing in about 5 or 6 months.
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Old 07-22-2014, 08:42 AM   #3
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It really depends on the life expectancy, and you have to go by the averages. Generally, insurance is not a great deal.

In my case, we are 12 years apart, so it might make sense. But I will probably still not do it.

If you a pension, and she does, plus SS, plus investments, the extra few years of collecting when someone is probably very old, won't matter.
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Old 07-22-2014, 09:19 AM   #4
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22 years later $370K won't be worth much.

It sure seems to me that one can cut out the insurance agent and their company and come out ahead. That is, instead of the pension paying for just the couple, it has to pay for both the couple, the insurance agent, and the insurance company.
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Old 07-22-2014, 10:00 AM   #5
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Now that you put it that way ....
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Old 07-22-2014, 10:14 AM   #6
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When my husband retired, he wanted to take the larger amount and get life ins. I told him I did not want to be a grieving widow, in my 80's, possibly suffering cognitive decline and have to make a critical decision about a large sum of money. He took the joint survivor option, and it gives both of us a great deal of peace of mind.


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Old 07-22-2014, 10:54 AM   #7
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Hi Takethis,
I would never use life insurance as an investment. To me insurance is a necessary evil for protecting against unusual, rare, worst-case scenarios....eventual death doesn't qualify in my definition.
For my megacorp pension, I had choices similar to yours, but also an option to take a lump sum, which is what I did. I can manage that money myself without giving a cut to an insurance agent. Do you have that option?
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Old 07-22-2014, 01:59 PM   #8
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Quote:
Originally Posted by dmdunca44 View Post
When my husband retired, he wanted to take the larger amount and get life ins. I told him I did not want to be a grieving widow, in my 80's, possibly suffering cognitive decline and have to make a critical decision about a large sum of money. He took the joint survivor option, and it gives both of us a great deal of peace of mind.


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That's why I wouldn't do that to the non-financial spouse. For me it might be OK.
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Old 07-22-2014, 02:02 PM   #9
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Old 07-22-2014, 02:32 PM   #10
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We took the J&S option simply because of the uncertainties involved at the time spans retirement could stretch. I was 52 and she was 46. That's a lot of time for inflation to take a toll.
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Old 07-22-2014, 03:55 PM   #11
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We executed J&S for our pension. In my mind, a pension is a form of life insurance, except the 'insured' person can enjoy it . Part of the reason I took a pension vs. lump sum was to have part of my retirement funds as a steady flow of income that would not be compromised by market changes. I mention this only to say that the pension provides piece of mind, for me. I do worry a bit about its funding but understand it is insured. For me, 'piece of mind' has some value (vs. who will die first, what about inflation, etc) and that is why I would go the J&S route.
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