Pension Maximization

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Pension Maximization is a strategy to help get the most out of defined benefit pension plans for married couples. With this strategy, a life insurance policy is purchased on the life of the plan participant prior to retirement. It may be purchased closer to retirement, but because of age and possible health issues, purchasing the policy sooner may be in the client’s best interests.

The participant’s spouse is named as the beneficiary of the life insurance policy. The life insurance policy’s death benefit would seek to match an amount that would replace the benefits for the surviving spouse as if the Joint and Survivor benefit option was selected.

At retirement, the plan participant selects the Life Only benefit option in order to receive the larger benefit amount. With the larger benefit, the participant will use a portion of the pension benefits to invest in a guaranteed vehicle, designed to match the benefit that would be provided for the beneficiary spouse.

The goal is to provide the spouse with the same benefit amount as if he or she elected the Joint and Survivor benefit option while the extra funds not used for the guaranteed investment provide the plan participant with a larger, “maximized” pension benefit. When the plan participant dies, a guaranteed benefit is paid to the spouse beneficiary generally income tax-free. The benefit can then be used to replace the lost pension income as a result of the plan participant’s death. This can be accomplished through taking the benefit proceeds as a life settlement option, using the benefit proceeds to purchase an annuity, or using other savings vehicles. Pension Maximization can be a strong strategy with teachers, federal government employees, and state and municipal employees. Consider the strategy for married individuals who participate in defined benefit pension plans and are comfortable using a portion of their pension benefit to fund a personally owned, guaranteed vehicle.

Maximum Pension Income

By selecting the Life Only option, the plan participant receives a larger benefit. Should the spouse die first, the participant isn’t left with a reduced benefit should he or she have chosen the Joint and Survivor option. Under this scenario, the participant may also access his or her cash values to further help supplement retirement income.

Benefit for Plan Participant’s Spouse

When the plan participant passes, the spousal beneficiary receives the benefit generally income tax-free, which replaces the discontinued pension income.

Possible Inheritance for Heirs

If the spouse predeceases the plan participant and the guaranteed vehicle is kept in force until the plan participant’s death, he could change the beneficiary designation to his heirs and then the plan’s death benefit would pass to them.

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