Consider this scenario: You are about to retire and are offered a pension of either $3,000 per month during your lifetime or $2,500 per month over the lifetimes of both you and your spouse. If you are married, taking the lower amount may initially seem like the best choice to help ensure continued income for your spouse should you die first.
However, there is another strategy that may allow you to select the higher monthly pension benefit, while still providing income for your surviving spouse. This alternate pension strategy involves coupling the higher monthly pension benefit with a life insurance policy. If you predecease your spouse, the policy’s death benefit will help provide a supplemental source of retirement income to offset the loss of your pension benefit (which will end at your death). This approach offers a number of advantages:
o You and your spouse receive added monthly income from the higher pension benefit. You can use a portion of these funds to pay the premium on the life insurance policy. As long as you keep an adequate life insurance policy in place during retirement, your spouse will have a source of retirement funds if you should die an untimely death.
o A life insurance policy can help provide you and your spouse with a ready source of cash for emergency or other needs. Some life insurance policies accumulate a cash value, in addition to providing a death benefit. These cash values accumulate on a tax-deferred basis. The insured can borrow against the cash value during his or her life, generally at a minimal cost, although an unpaid loan will reduce the death benefit amount. Policy withdrawals are not subject to taxation up to the amount paid into the policy. Policy loans and or withdrawals will be taxable to the extent of gain if the policy is a Modified Endowment Contract (MEC). Access to cash values through borrowing or partial surrenders can reduce the policy’s cash value and benefit, increase the chance the policy will lapse, and may result in a tax penalty.
o Life insurance provides a source of funds for your surviving spouse. Policy cash value or death benefit proceeds can be used in whatever manner your surviving spouse chooses, such as for a source of supplemental income.
However, this type of pension strategy requires disciplined management to achieve the desired results. First, you may not qualify for life insurance, or premiums may be higher than anticipated.
Also, your life insurance policy may not perform as anticipated or may lapse if the premiums are not paid. Second, a lump-sum death benefit must be properly managed to yield the anticipated income. Your surviving spouse must be able to reinvest the death benefit for retirement income with the risk that the investment may not perform as anticipated or may produce less income than required. There is an additional risk that your spouse may outlive the death benefit income or that the death benefit may “over fund” your spouse’s needs.
Third, if you waive the spousal provision, your spouse may lose benefits provided in conjunction with a pension, such as health insurance or cost-of-living adjustments, and may be unable to independently obtain them. Finally, the issuance of a life insurance policy is subject to underwriting and is not guaranteed, whereas with a pension, you can be a smoker or in poor health and still receive benefits. For assistance with your situation, be sure to consult a qualified financial professional.