Choosing Pension Options

Many people may overlook the role life insurance can play in protecting their retirement income.

Assuming you are not interested in receiving a lump sum distribution, a life insurance policy can give you a pension of either $3,000 per month for the rest of your life (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 married couples, the joint and survivorship option may be the best choice, even if the monthly benefit is lower, since it ensures continued income for a surviving spouse. However, another strategy involves selecting the single life option with the higher monthly benefit for your spouse and using some of that extra benefit to pay the premium on a single life insurance policy for yourself. This approach offers some important advantages:

• Higher Monthly Pension Benefit. You and your spouse may receive a higher monthly pension benefit during your lifetime.
• Supplemental Income for a Surviving Spouse. If you predecease your spouse, the death benefit may be used to help offset the loss of your pension benefit. While you will owe current income taxes on your pension plan distributions, death benefits are generally income-tax-free, although they may be subject to estate taxes if designated for the benefit of someone other than a surviving spouse. Also, cash value or death benefit proceeds are not subject to the minimum distribution rules inherent in other tax-deferred vehicles.
• Cash Value Accumulation. A cash value policy can also be a ready source of funds for emergencies or other needs. The cash value accumulates on a tax-deferred basis and can be borrowed against during your lifetime, although this could affect the death benefit and may have adverse tax consequences.

It is important to note that this strategy requires disciplined management. 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, to yield the required income, the lump sum death benefit must be properly managed. Third, by waiving the spousal provision, your spouse may lose other pension-related benefits, such as cost-of-living adjustments or company-sponsored health insurance. Fourth, since the issuance of a life insurance policy is not guaranteed, you should proceed carefully with this approach until a policy has been issued in your name. Finally, the policy premium depends on your age and health condition; if it is too high, this strategy may not make sense.

Because so much is at stake, you may wish to consult a qualified financial professional before proceeding with this strategy.