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The Most Expensive Life Insurance Policy You Can Buy: How it Affects Your Personal Pension Formulation Options If you are lucky enough to be among the 7% of Americans who still hold a pension, we have a revelation for you: Whether or not you realize it, this pension may be costing you as much as an expensive life insurance policy would. Here’s why your private or public pension may be costing you the same amount as a high-payout life insurance policy, and why you may want to consider exploring other options to offset or defer this cost. How Does Your Pension Compare to a Life Insurance Policy? Here is a hypothetical story that illustrates how many pensions stack up against an expensive life insurance policy: Bob is a public employee who is given two options for pension benefit distribution: 1.) single life only, and 2.) joint survivor. He is married, and wants his wife to receive benefits after he dies. Although he doesn’t realize it, at least one of these pension options is going to be equivalent to purchasing life insurance – and it’s the most costly life insurance money can buy. Pension Option #1: Single Life Only Pension First, Bob looks at the single life only pension option. If he chooses this option, he will receive a $4,300 per month pension benefit for as long as he lives. However, this monthly pension benefit will stop when Bob dies. It does not matter if he retires at 65 and lives to be 66; the pension stops when Bob dies, and his wife will not receive a survivor benefit because this is a single life only pension (the benefits are pretty much defined in the name). To that end, this option is not like buying life insurance – but on the other hand, it provides Bob’s wife with no income whatsoever after his death. So, which type of pension would enable Bob’s wife to receive a survivor benefit? That would be a joint survivor pension. Pension Option #2: Joint Survivor Pension If Bob wants his wife to receive his pension after he dies, he can choose the joint survivor option. With a joint survivor pension, Bob’s wife would continue to receive a monthly benefit after his death – but that $4,300 a month would be reduced, potentially by up to 25%. In a very likely scenario, the $4,300 monthly benefit would be reduced down to about $3,600 per month; this is the case even while Bob is still alive. That means Bob and his wife would be giving up:
In other words, they paid their pension company $210,000 for a life insurance policy without even knowing it. What Are Possible Alternatives? If Bob doesn’t want to have his pension reduced by $700 per month but he does want his wife to continue receiving income, one strategy would be to: 1.) choose the single life only pension, and 2.) purchase an actual life insurance policy that would pay out $210,000 or more to his spouse upon his death. He could easily find a policy that costs less than $700 per month, so that money would stay in his pocket – not his pension company’s. His wife would continue to receive an income after his death, because it would be paid out by the insurance company – and while he is alive, the couple would have another $700 of income every month. This is just one of the strategies that pension holders can implement. Pensioned employees of all varieties can use these strategies, including:
In any of these occupations, you don’t have to give up your current income in order to leave behind something for your spouse. If you are a pensioned employee, you can discuss strategies like this with a CERTIFIED FINANCIAL PLANNER™ professional. Call (888) 994-6424.
All numeric examples and any individuals shown are hypothetical and were used for explanatory purposes only. Actual results may vary.
Life insurance should be purchased by individuals that have a need to provide a death benefit to protect others with insurable interests in their lives against financial loss. Life insurance is not a retirement plan, investment, or savings account.