Tips for Pension Maximization Using Life Insurance
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Written by
Chris Huntley
Founder of Huntley Wealth & Insurance Services
Rachael Brennan has been working in the insurance industry since 2006 when she began working as a licensed insurance representative for 21st Century Insurance, during which time she earned her Property and Casualty license in all 50 states.
After several years she expanded her insurance expertise, earning her license in Health and AD&D insurance as well. She has worked for small health insu…
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Reviewed by
Rachael Brennan
Licensed Insurance Agent
UPDATED: Feb 16, 2022
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Here’s the Scoop
Pension maximization is a retirement strategy that uses a life only annuity to provide income for a couple and then life insurance to provide income for a surviving spouse
Pension maximization using life insurance can provide higher payments to the couple, but it takes more planning
Using a standard joint and survivor annuity provides smaller payments for the couple but includes unplanned survivor’s benefits and the need for life insurance
When you’re trying to plan for retirement and long-term needs, you want to ensure that your spouse and other dependents are cared for after you pass away. Although there has been a decline in the use of pension plans with the rise of defined contribution plans, it is still possible to use this type of retirement strategy.
Read more below about pension maximization using life insurance, the pros and cons of pension maximization, and pension survivor benefits vs. life insurance.
If you need to find a life insurance policy that works for your pension maximization needs, enter your zip code into our free quote comparison tool above.
What is pension maximization?
Pension maximization refers to a retirement strategy that involves taking high annuity payments for one spouse’s lifetime and purchasing life insurance to protect pension income by providing the surviving spouse with income.
A pension maximization strategy using life insurance typically involves a life only annuity, which generally provides the highest payments and ceases when the individual dies. Life insurance will then provide the surviving spouse a death benefit.
A married couple could use a life only annuity to pay for their living expenses plus the cost of a life insurance policy. Then, when the annuitant dies, the surviving spouse can take the death benefit from the life insurance to purchase a guaranteed fixed annuity that will make regular payments to be used for income until they die as well.
If the spouse who is not covered by the pension passes away first, the annuitant can cancel the life insurance policy and continue to receive the life only annuity payments.
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What are the benefits of pension maximization?
While a pension plan with life insurance has its risks, it also has advantages. First, a life only annuity is likely to make higher payments than a typical joint and survivor annuity. Second, the surviving spouse will not have to compromise on the income and lifestyle they adapted to while the annuitant was alive (as long as they purchase sufficient life insurance coverage).
The benefits of this strategy can also depend on the type of life insurance purchased. For example, a permanent life insurance policy has more features to maximize wealth, such as a cash value account. Therefore, the couple could take out loans against the policy’s cash value if they have emergency expenses or large purchases. Examine the pros and cons of permanent life insurance below.
Pros and Cons of Permanent Life Insurance
Pros of Permanent Life InsuranceCons of Permanent Life Insurance
– Cash value accumulation that you can use for emergencies, large purchases, and more
– Flexible premium payments
– Tax benefits, such as tax-free death benefit and tax-deferred cash value accumulation- More expensive than term life insurance
– Your policy could lapse and rates could be higher to restart coverage
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In addition, the death benefit is relatively immediate. As a result, the death benefit can be used tax-free, whereas pension payments will continue to be taxed following the pensioner’s death.
What are the risks of pension maximization using life insurance?
Pension maximization using life insurance can be risky if the couple doesn’t plan ahead. (A pension maximization worksheet can help calculate your income needs.)
First, the couple must ensure they can make the premium payments on the life insurance. If they miss premium payments, the policy could lapse, resulting in lost coverage for the remaining spouse. In addition, they must be careful if they take out loans against the cash value of a policy, since outstanding loans could be deducted from the death benefit when the policyholder dies.
Second, the couple must ensure that the pensioner is insurable. It may be beneficial to review life insurance options before accepting payments from the pension plan. In that case, you could lock in life insurance rates for an extended period and build cash value if you select a permanent policy. However, the life insurance rates should not exceed the amount that the couple is saving. Otherwise, this strategy isn’t worth it.
Finally, planning is the best way to ensure that the pension plan and life insurance policies are well-funded. However, the couple should also consider their options if the pensioner loses their job.
Should I choose a life only or a joint and survivor annuity?
If you’re debating between taking pension options vs. life insurance, read below about the pros and cons of a typical pension plan compared to pension maximization.
While a life only annuity makes payments for only one person’s life — without remittance for surviving spouses — a joint-and-survivor annuity makes payments for the life of the annuitant plus a second annuitant. While this has a stronger guarantee of remittance, the payments are lower than those from a life only annuity.
Both types of annuities will be subject to income taxes. However, if the surviving spouse chooses to live off of the life insurance death benefit, they can use these funds tax-free rather than continuing to pay taxes on a joint and survivor annuity.
A joint and survivor annuity also will not provide the surviving spouse with a lump sum payment to cover final expenses, such as the cost of a funeral and burial. In addition, if the surviving spouse has other sources of income (such as retirement benefits or life insurance), it also may not make sense to accept smaller payments.
In summary, the joint and survivor annuity involves less planning but results in small-scale payments. In comparison, the life only annuity results in larger payments, less time, and additional planning.
If you’re interested in pension maximization using life insurance, enter your ZIP code into our free quote comparison tool below to find a life insurance policy that works for you.
