I would like to give an example of how the technique “Pension Maximization” works to clear up some confusion and questions.
To keep the example simple I will use the 5 Year Certain Option - vs - 50% Survivorship Option to illustrate the advantage to “Pension Max”.
First, you need to understand what you are replacing with the life insurance.Most Pensioners’ want to protect their spouse with a pension benefit.Most would like to take the 5 Year Certain Benefit because that benefit puts the most money in their pockets but realize if they die after the fifth year of collecting the pension benefit, the spouse will receive NO pension benefit.How does GE pension benefits work?
Ex.:Pensioner-Male 55, Good Health, Non-Smoker
Reduced (due to buyout) pension with:
5Year Certain Benefit = $1,800/Month
50% Survivorship Benefit = $1,650/Month
Pensioner chooses the 50% survivorship option, what does that mean?It means that the pensioner will receive $1,650 instead of the $1,800 per month while living and if he dies his wife will receive 50% of the $1,650 or $825 per month, hence, 50% survivorship option.So the cost to the Pensioner is $150 a month for the 50% survivorship benefit;
$150 or $1,800Annual.
Now, “Pension Maximization” tries to enhance your retirement by doing 4 things:
Save on Taxes;
Give Flexibility on Monthly Benefit; and
Leave a Legacy for your Beneficiaries.
In the example of the 55 year old male pensioner, he will need a life insurance policy with a death benefit of $150,000.How do I get the number $150,000? I back into it, meaning @ a 6% return what dollar amount do I need to produce an $825 monthly stream of income?
Life Insurance $150,000 (Death Benefit) x 6% = $9,000 Annually
50% Survivorship Benefit $825 x 12 = $9,900 Annually
With this example I do not take into account any other Life Insurance policies that the Pensioner has in force (almost all of you have GE Group Life).
The Life Insurance I am proposing is a guaranteed product which says as long as the premium is paid the policy will stay in force as illustrated.In all cases I have the policies illustrate into the early to mid 90’s of age.The premium for the $150,000 Life Policy is $150 a month or $1,800, annually.
So in this example, without including any other policies which may be in force we do not save any money, but let’s look at the other 3 reasons to purchase the life insurance.
TAX ADVANTAGE- Life Insurance proceeds are 100% income tax free.Your pension is 100% taxable.Using life expectancy tables, and not to get too technical, a husband & wife 55 years of age will only pay an estimate tax on 30% of the monthly income from the life insurance proceeds.
Pension $9,900 x 20% tax rate = $7,920. Net Annual Benefit
Life Insurance $9,000 (of which only $2,700 taxed at 20%)
$9,000 - $540. (2,700 x 20%) = $8,460 Net Annual Benefit.
Tax Savings of $540 Per Year.
A dollar today will not have the same purchasing power 10 years from now.With that said the surviving wife will need more money on a monthly basis at that time when her husband dies. With GE’s survivorship benefit she is locked into that dollar amount.With the Life Insurance Plan the wife can determine what she will need on a monthly basis and will be able to receive that dollar amount because the life insurance benefit is 100% flexible.
The 55 males chose the 50% survivorship benefit through GE. He dies. The wife receives the 50% benefit and 2 years later she dies.What happens to the rest of the money GE put aside for these two?You guessed it, right back in GE’s pocket!In the same scenario with Life Insurance, once the wife passes the unused life insurance money will go to the beneficiaries of the deceased!
Hopefully, this clears up some confusion.This is only an example. These numbers will vary from one person to the next based on pension numbers, age, health, smoking status and other policies and assets of the pensioner.A proper plan will take in all these variables to come to a solution.
If you have to make a decision on the pension please call me, you need to at least explore the option of Life Insurance.If you don’t you may hurt your spouse in the long run.Please give me a call, at no obligation, so we can explore this option @ (518) 373-0069 ext. 115 or (518) 858-6634.