Broker Check

Know Your Pension Payout Options

| March 28, 2018
Share |

Potential retirees are often familiar with the typical pension payout options that include the single life option, the joint and survivorship option, and the lump sum distribution. However, another strategy using life insurance offers an alternative. This approach combines the single life option with a life insurance policy to produce a higher monthly pension benefit along with a death benefit that may be used as a source of retirement income for a surviving spouse. Here is a closer look at this approach: 

Suppose, you have the option of receiving either a pension of $3,000 per month for the remainder of your lifetime (the single life option), or $2,500 per month to be spread over the lifetimes of both you and your spouse (the joint and survivorship option). For a married couple, the joint and survivorship option may initially seem like the best choice, because, even though the monthly benefit is lower, it ensures continued income for a surviving spouse. 

However, another possibility is to select the single life option with the higher monthly pension benefit and use a portion of this amount to purchase a life insurance policy on yourself. This, of course, assumes that you qualify for a policy, subject to underwriting. If you die before your spouse, the death benefit will provide your spouse with a source of income to help offset the loss of your pension benefit. This strategy offers a number of advantages: 

o You and your spouse receive a higher monthly pension benefit. You can use a portion of these funds to pay the premium on the life insurance policy. As long as you maintain adequate life insurance coverage, it will provide your spouse with a source of retirement income in the event you die first. 

o A cash value policy can provide a ready source of funds for emergency or other needs. In addition to providing a death benefit, cash value life insurance accumulates a cash value on a tax-deferred basis. As the insured, you can borrow against the cash value during your life, generally at a minimal cost. However, it is important to note that withdrawals and loans taken against a policy’s cash value could affect the death benefit and may have adverse tax consequences. 

o Life insurance provides a source of supplemental income for a surviving spouse. Cash value or death benefit proceeds are not subject to the minimum distribution rules that are inherent to other tax-deferred vehicles. Death benefits are also generally received income tax free, although they may be subject to estate taxes. They may be used as a source of supplemental income or in whatever manner your surviving spouse chooses. 

Despite its advantages, this strategy requires disciplined management to achieve the desired results. First, your life insurance policy may lapse if the premiums are not paid or if substantial cash values are borrowed and interest is not paid. Second, a lump sum death benefit must be properly managed to yield the anticipated income. Third, by waiving the spousal provision, your spouse may lose benefits provided in conjunction with the pension, such as health insurance or cost-of-living adjustments. Fourth, the issuance of a life insurance policy is not guaranteed. You should take care about proceeding with this approach until a policy has been issued in your name. Finally, the issuance of a policy at a reasonable premium (which would depend on your age and health condition) is not guaranteed. If the premium takes up too much of your monthly annuity amount, this strategy may not make sense. 

It is also important to note that you will owe current income taxes on your pension plan distribution. With so much at stake, you may wish to consult a financial representative when selecting your pension payout option.

Share |