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If you have spent the majority of your professional career at a large corporation or government agency, you can probably look forward to collecting a pension when you retire.

Most pension plans offer two options: a joint-pension payout or a single life payout. A joint-pension plan will offer you and your spouse a reduced monthly payment until you both pass away. A single life pension will pay a larger payment to the pension earner only until they pass away.

By electing a single-life pension and purchasing a life insurance policy to protect your spouse instead of choosing the joint-pension plan, you may be able to save over $1,000 each month. This strategy may seem confusing, but it’s actually quite simple.

In this article we’ll explain how pension maximization works and provide insider tips to help you select the best life insurance coverage for the money.

Quick Article Guide:

1. What is a Pension Maximization Strategy?
2. How to Set Up a Pension Maximization Plan
3. How Much Life Insurance Coverage Do I Need for Pension Maximization?
4. Potential Challenges with Pension Maximization
5. What if I Outlive My Spouse and I No Longer Need Life Insurance?
6. What Else Should I Consider Before Deciding On My Pension Options?
7. Layering Life Insurance for Pension Maximization
8. How We Can Help You with Your Pension Maximization Needs

What is a Pension Maximization Strategy?

A pension maximization strategy is designed to help stretch a retiree’s pension funds by purchasing life insurance instead of electing a joint-pension option. Here’s how it works:

As you approach retirement age, your company will offer you at least two pension payout plans. The first pension option is a called a single-payout. With a single-payout pension, the pension earner will receive a larger monthly pension check but these monthly payments will stop when the pension earner passes away. The second pension choice is called a joint-payout. With a joint-payout pension, your pension checks will be smaller, but if your spouse outlives you, the monthly payments will continue until their death.

To maximize your pension, the pension earner would select the single-payout pension option and use the money they save each month to purchase a permanent life insurance policy. The permanent life insurance policy will provide the pension earner’s spouse with an income if the pension earner passes away first. Pension maximization is ideal for pension earners who are in average or better health because they can usually save a considerable amount of money each month while still providing their spouse with an income safety net. 

How to Set Up a Pension Maximization Plan

As you are approaching your planned retirement date, you employer will usually provide you with your pension options. Your employer should provide you with a projected monthly payment amount for a single-payment pension and a joint-payment pension. As soon as you receive these projected numbers, we recommend applying for a life insurance policy. A life insurance policy takes 6 to 8 weeks to get approved, and you want to make sure you have plenty of time to review your options before making a decision.

Applying for life insurance is free, and there is no cost or obligation if you decide not to accept the coverage. Once you receive your approved life insurance policy, you can adjust your coverage amount, accept the policy as is, or decline to accept the life insurance coverage.

You don’t want to make any decisions about your retirement until you have your approved rates for the life insurance policy. If the life insurance is more expensive than the amount of money you will save each month on your pension, don’t buy the coverage!

How Much Life Insurance Coverage Do I Need for Pension Maximization?

To determine the amount of life insurance you need for your pension maximization strategy, you want to calculate the amount of money your spouse would need to survive if your pension stopped paying.

The best way to explain pension maximization is by using a real-life example of a client we’ve helped.

Last year we helped a couple with their pension plan. George was turning 64-years-old and was approaching his retirement from the post office. His wife Susan is 59-years-old and no longer works. George has a strong feeling that his wife will probably outlive him because most of the women in her family live until they are almost 90. The average woman in the United States lives to be 86 years old and it is common for women to outlive men.

After reviewing his pension plan, George realized that the single-payout option from his pension would allow him to receive $5,500 per month until he passes away. His other pension choice was the joint or survivor-payout. This option would pay him and his wife $3,500 per month until both of them pass away. George doesn’t want his wife to be without an income when he passes away, but he realizes that $3,500 per month won’t allow him to enjoy his retirement as much as he would like to.

George’s Options

Single Payout: $5,500 per month
Joint/Survivor Payout: $3,500 per month

Most of the men in George’s family live until they are in their early 80’s. If George lives another 20 years to age 84, he will be leaving his wife behind at the age of 79 without an income, and she will most likely live another 10 years. Without George, Susan will not need as much money each month to survive because she will not need to pay for George’s healthcare or living costs.

If George and his wife elected the joint-survivorship pension option, Susan would collect approximately $320,000 over these 10 years before taxes, or about $210,000 after taxes. In order to properly utilize the pension maximization strategy, George would choose the single-payout option only if he is able to secure a permanent life insurance policy with at least a $210,000 death benefit for less than $2,000 per month, or $24,000 per year. This coverage amount would provide enough money for his spouse to survive for at least 10 years.

George was in pretty good health overall and was approved for a lifetime policy until age 100 with $500,000 of coverage. This life insurance policy is extremely conservative. It will provide Susan with almost 25 years of pension income replacement when George passes away. If George passes away next year, or even if he lives into his late-90s, his wife should have ample income replacement to pay the bills for the rest of her life.

George’s lifetime policy was only $8,655 per year, or about $725 a month. By utilizing life insurance to maximize his pension, George and Susan will have peace of mind and $4,775 a month to enjoy retirement instead of only $3,500. George and Susan are saving more than $15,000 a year by maximizing their pension plan with life insurance. Even if George was in fair health, his rates would still be a lot less than the pension reduction he would have faced each month by electing the joint-survivorship pension option.

If you utilize life insurance to maximize your pension, when you pass away, your spouse will no longer receive your monthly pension checks. Instead, they will receive a large sum of cash from your life insurance policy. This death benefit can be paid out as a one-time tax-free lump sum to invest and live off of the rest of their life, or dulled out each year as an annuity. A pension maximization strategy should provide your spouse with at least the same amount of money that they would have received at your passing if you had chosen the joint-survivorship pension plan.

In George’s situation, Susan will likely receive a lot more money from the life insurance policy than she would have ever received over the pension plan. In addition, the death benefit from George’s life insurance policy is income tax free. Most pensions are taxed at a rate of roughly 35%! By utilizing pension maximization with life insurance, George and Susan have more money each month to get the most from their retirement.

Potential Challenges with Pension Maximization

The most important factor when deciding whether or not to purchase life insurance for pension maximization is the insurability of the pension earner. Most life insurance companies will completely overlook preventative medications for issues like high blood pressure or cholesterol. But health issues like heart disease can make life insurance extremely expensive.

In this situation, purchasing life insurance may be more expensive than selecting a joint-payment pension plan to protect your spouse. This is why it is so important to apply for life insurance BEFORE you select your pension plan. It is essential that you make purchasing coverage a top priority as soon as you know you need it; life insurance can take a couple of months to get approved, especially if you have extensive medical records or multiple doctors. In addition, you want to make sure you give yourself plenty of time to develop an informed decision because most pension plan selections are permanent.

Remember, if the life insurance does not make financial sense, you are not obligated to purchase the policy and no money is due. The application and approval process for life insurance is free. State laws also require the insurer to provide you with a “free-look” period before accepting or declining your policy. This is usually a 30-day period after the policy has been mailed to you for review.

If your life insurance policy is approved at a rate that is higher than the pension deduction you are facing each month, or you do not get approved, DO NOT buy the life insurance and select the joint-pension option instead.

For pension maximization to be effective, you will need to buy a life insurance policy that will not expire before you do. This is because your policy must be active when you pass away or it will not provide a death benefit to your spouse. This is why we never recommend term life insurance for pension maximization. Most term life insurance policies will have expired by the time you reach the age of 80. Most Americans are living past the age of 80 already, and we are continuing to live longer and longer.

We recommend purchasing a permanent life insurance policy THAT DOES NOT require an investment value or promises to build a cash value. These policies can take decades to build up a sizeable cash value and are never worth the extra money. We specialize with life insurance policies with guaranteed rates and coverage until the age of 90, 95, 100, 105, 110, even 121. Due to increasingly higher life expectancies, we always recommend purchasing a life insurance policy that will lock in your rates and guarantee your coverage until the age of 90 or later.

What if I Outlive My Spouse and I No Longer Need Life Insurance?

If you outlive your spouse, you may determine that you no longer need life insurance to maximize your pension or provide financial support to your spouse. As emotionally difficult as it may be to outlive a spouse, you can rest assured that you made the right financial decision by choosing the single-payout option. This is because you will continue to receive $5,500 per month until you pass away, rather than the $3,500 that you would have received had you chosen the joint payout.

If you outlive your spouse, you’ll have two options regarding your life insurance policy for pension maximization.

The first option is to cancel your life insurance with no penalties or money due, and you can spend the extra money each month as you please. The other option would be for you to continue to pay for your life insurance policy and leave it behind as an inheritance. The death benefit from your life insurance policy can be left behind for your children, grandchildren, or your favorite charity. You can change the beneficiaries on your life insurance policy at any time for any reason.

What Else Should I Consider Before Deciding On My Pension Options?

Although rare, some pension plans include guaranteed health insurance. Considering how expensive health insurance becomes after age 65, if health insurance is included in your pension payment plan, it may be wiser to elect the joint-payout option. Make sure you determine whether or not your pension plan offers this benefit before making a decision. The exception to this rule would be if your spouse had access to similar health insurance coverage and the total cost of their life insurance and health insurance is still less than your pension reduction.

For those with spouses who are significantly younger, pension maximization might not be the best strategy either.

Let’s say that Susan from our previous example is 10 years younger. If we change Susan’s age to 49, and assume that Susan will live to be 86 years old, George would need a policy for about $1,000,000 dollars to replace the income lost from the joint payout.

$3,500 (per month) x 12 (months per year) x 37 (years) = $1,554,000

After taxes of 35% = $1,010,100

Even if George were in excellent health, a permanent life insurance policy for this amount would be extremely expensive (roughly $1,500 per month). Although purchasing this policy would still save George and his wife money, it may be wiser for George to stagger, or layer, his coverage. Layering life insurance coverage involves multiple life insurance policies with varying lengths of coverage.

Layering Life Insurance for Pension Maximization

To better explain how to layer your life insurance, let’s use the example from above and say your wife is 49 and you are 64. We’ll also continue assume that your wife will live until the age of 86.

The joint-pay option will provide your wife with a lifetime benefit of about $1,000,000 after taxes, assuming you pass away tomorrow. As time goes on, however, the amount of money that your spouse stands to lose from your pension plan will decrease.

If you were to pass away in 20 years at the age of 84, your wife would be 69 and she would stand to collect about $500,000 from your pension after taxes.

$3,500 (per month) x 12 (months per year) x 17 years = $714,000

After taxes of 35% = $464,100

To save money, you can buy a 20-year term policy for $500,000 and a permanent policy for $500,000. A 20-year term policy for $500,000 and a permanent policy for $500,000 of coverage will cost about $13,000 a year, or $1,100 a month for a male in excellent health. Layering your life insurance instead of purchasing a $1,000,000 permanent policy will save you about $400 a month, or $5,000 a year. Over the course of 37 years, this is more than $185,000.

If you pass away before age 84, your wife will still receive $1,000,000, tax-free. If you pass away after the age of 84, your wife will still receive the same monetary benefit that she would have received from your pension after taxes. If you need help figuring out how much coverage you need, please give one of our agents a call, and we can help you determine the right amount of life insurance coverage for your unique situation.

How We Can Help You with Your Pension Maximization Needs

If you are on the verge of retiring, we would be happy to help you determine if a pension maximization strategy would be beneficial to you and your spouse.

By working with more than 60 top-rated life insurance companies, we’ll be able to shop the market to provide you with the best policy available for the lowest cost. Our agents specialize with permanent affordable life insurance options and although we also sell term life insurance, we will not try to force you into a traditional term policy that you will likely outlive. We take the time to find each of our clients the life insurance policy for their needs.

By having access to so many companies, we will also save you money by shopping the market to find your most affordable options, and we only work with A-rated life insurance companies that have never failed to pay a claim. If you have any questions about pension maximization strategies, or how much coverage to buy to replace your pension, give us a call and we will be happy to help you.

Retirement is an exciting time for most people; it’s a time in which you can relax and enjoy everything that you’ve worked so hard for. However, you will want to make sure that you make the best financial decisions in order to preserve and pass on all of your hard earned assets. If you are running the numbers and think that pension maximization may be the best option for your situation, give us a call and we’ll provide you with accurate quotes to see if pension maximization makes sense.

Just remember to start the process early and do not make a decision about your pension until you have been approved for your life insurance policy. As an owner-operated agency, our agents do not have any “quotas” or “sales goals” to meet, our only goal is to provide the best service to our clients. Give us a call today toll-free at 855-902-6494, or you can request a free quote online below to shop dozens of companies in less than a minute.