by Arose » Wed Sep 08, 2010 07:26 pm
My husband just retired. Should I take out a $500,000 guaranteed universal life insurance policy on him and let him take the higher pension amount? What if we divorce in the future? Can he be made to continue to make premium payments?
Posted: Thu Sep 09, 2010 03:18 am Post Subject:
If you divorce pension benefits or life insurance proceeds could be fought over. You're asking the wrong question there, that wouldn't matter.
The option you are referring to is commonly referred to as pension maximization by industry professionals, and it's a very common practice.
The questions are does it make sense for you.
It's very simply to answer this question. Does excepting the single life payout on the pension generate enough extra income to afford the life insurance premiums and net out more money than choosing the joint life option? If the answer is yes, than it makes perfect sense to choose the single life option and buy the life policy. But get your husband underwritten and approved by the insurance company first.
Posted: Thu Sep 09, 2010 11:40 am Post Subject:
Is a single life payout always better than the joint life option if it leaves some extra money even after supporting your life insurance premiums? Aren't their any drawbacks?
Posted: Thu Sep 09, 2010 05:20 pm Post Subject:
Is a single life payout always better than the joint life option if it leaves some extra money even after supporting your life insurance premiums? Aren't their any drawbacks?
Jeremy . . . There are several ways to view this situation. "Better" is always in the eye of the beholder. Some of what BNTRS has written is occasionally argued against on the basis of "well, if the insured dies too soon, then he will have paid too much for the insurance (or the "return on investment" will be lower). Others state that by paying a monthly premium, if he lives too long, the same diminishing "return on investment" occurs.
On the other hand, I insist that insurance is simply not an "investment" -- which leads to all other sorts of other "challenges". But that's not the point. You can read some of the discourse along all these lines in some other threads in this forum.
The point is, there are often some options a person may have when it comes to collecting a pension, a retirement benefit, and lifetime income. And insurance products (life insurance or annuities) can provide an alternative that might be more beneficial to all concerned. It's mostly a matter of taking the time to do the math involved. And the math can be very complicated, to say the least.
If there is a drawback to a single premium policy, it is mostly the amount of money necessary to fund the insurance. Where will that come from? Other than that, insurance is insurance. You live, you pay, you die, we pay. That's pretty simple to understand.
When BNTRS speaks of generating "enough extra income" he's probably speaking of the difference between the pension plan's standard payment and taking a lump sum buyout from the pension fund and using the money to fund a life policy instead. If the life policy would provide monthly income greater than the pension plan's, then it probably makes sense to look at the life insurance alternative.
It doesn't necessarily mean it is "better", it is simply different.
But BNTRS' other advice . . . to qualify for the insurance FIRST (meaning BEFORE taking the money out of the pension plan) . . . is absolutely one part of the best advice. The second part is the need to consult an income tax expert, which is not going to be a life insurance agent.
When the money comes out of the pension plan as a lump sum, there could be a huge tax implication that also has to be factored into the equation. The money cannot be rolled over into a life insurance policy to avoid taxation, but the life insurance benefit (including monthly income options) paid by the policy would generally be received without a current income tax implication.
On the other hand, pension money could be rolled over into a qualified annuity to avoid the immediate tax liability, but the income provided by the annuity would be taxable to the extent it exceeded the cost basis in the contract. In that regard, it might not be much different than the monthly pension, unless it provided a larger amount of money to all concerned.
Because money is involved, the person looking a retirement income options will be pulled on from many sides. Some of those who do the pulling do not always have the other person's best interests in mind. The simply see a big commission check at the end of the transaction.
Generally speaking, the decision the person makes will not be open to "do overs" if a dreadful mistake is made. This one time opportunity -- to take the monthly payment from the pension plan, to take a lump sum distribution and use the money to provide a different benefit, or to simply take the lump sum and use it -- is a serious decision and multiple advisers are usually required.
Not just one life insurance agent with a slick presentation and numbers that would seem to promise the moon and stars. The moon and stars are still unreachable for most of us.
Posted: Sun Sep 12, 2010 06:02 pm Post Subject:
Time out.
No one said anything about rolling money out of the pension. I was talking about a Pension max, which is simply the strategy of taking a single life payout and purchasing life insurance rather than taking a joint life payout from a pension plan.
Often times, the retiree ends up with more money in his or her pocket even after paying the life insurance premium.
but...
It all depends on the provisions on the pension plan. It won't always be the case that this will be true.
Taking a lump sum payout from the pension plan is a completely different scenario.
Posted: Tue Sep 14, 2010 07:12 pm Post Subject:
Thank you BNTRS. You understood my question. I believe he will be approved for the insurance, but I won't make my final decision to take the higher pension until that is confirmed. The difference between taking out the higher pension amt and the survivor pension amt will cover the monthly premiums with a little cash left over. I am told that it is a Win Win situation. The longer he lives the better off I am though.
Posted: Tue Sep 14, 2010 09:12 pm Post Subject:
Don't forget the other side of the coin. Your husband truly benefits if you die first. He has the larger pension. He can quit paying on the life insurance and use that money for beer.
Posted: Wed Sep 15, 2010 02:36 am Post Subject:
Ignore arkeuvmv nonsense, if getting insurance and taking a single life payment from the pension leaves you with enough monty to pay the premium and have money left over, it's likely a good option.
Make sure you have the write type of life insurance though. Whole Life of Guaranteed Universal Life Insurance (aka Secondary Guaranteed Universal Life). Current assumption Universal Life is not a guaranteed death benefit for the premium, and that is crucial in this situation.
Also be sure that the policy isn't Current Assumption with a secondary guarantee for a specific period of time, unless that time brings your husband to age 100 or 121 (would be rare for a current assumption product).
Posted: Wed Sep 15, 2010 02:36 am Post Subject:
Also, if your agent is talented enough to bring this option to you, he or she should be smart enough to recommend that appropriate product.
Posted: Wed Sep 15, 2010 08:55 pm Post Subject:
Ignore arkeuvmv nonsense
Wait a second. My point may not have been made in the clearest of ways, but it is a very valid one. Let me give an example with completely fictional numbers.
Jim is retiring. He has a pension. He can either take $5,000/month for as long as he lives or $3,000 for as long as he or his wife lives.
He loves his wife and wants to provide for her, so just taking the $5000 isn't an option.
$2,000 buys enough life insurance so that his wife will still have $3,000/month if he dies first.
Options and results:
Don't buy life insurance:
While both are alive: $3,000 monthly income
Jim dies first: $3,000 monthly income for Jim
Jim dies first: $3,000 monthly income for wife
Buy Life insurance:
While both are alive: $3,000 monthly income ($5,000-$2,000 insurance premium)
Jim dies first: $3,000 monthly income for wife (we’re making the assumption that the death benefit is one big enough to do this)
Wife dies first: $5,000 monthly income for Jim (He doesn’t need to keep making the life insurance premiums. (This is what I meant by my last post. This is the part of the equation that gets ignored in the pension max conversations. )
Posted: Thu Sep 16, 2010 02:23 pm Post Subject:
$2,000 buys enough life insurance so that his wife will still have $3,000/month if he dies first.
True, the numbers are fictional. If the couple could exist on the $3,000, then the $2,000 could be devoted to life insurance. It would be the only thing available to promise the future benefit outside the pension plan.
But the whole plan really needs to be worked out WELL IN ADVANCE of the retirement event -- perhaps as much as a year in advance -- in order to pass underwriting, to be able to "crunch the numbers" to make sure the plan will work as expected, and to finalize the details. Because once the pension benefit option is chosen, there are no do-overs allowed.
Do things in the wrong sequence . . . retire first, attempt "pension max" second . . . and then not be able to be underwritten for the plan that would provide the $3,000 for $2,000 . . . and retirement might depend on having to pass out shopping carts at WalMart, as long as they maintain Sam Walton's philosophy of giving people a place to work, no matter how old they are.
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