Takethisjoband
Confused about dryer sheets
- Joined
- Jul 21, 2014
- Messages
- 3
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!
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!
. 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.
