Weighing the options
The specific options will vary from plan to plan, but, in broad terms, the choice boils down to:
Pension maximization with life insurance
Because an SL benefit will generally be a higher amount, using a life insurance strategy may be an option to help maximize a couple's plan benefits.
Using pension maximization: How it works
Pension maximization: It's not right for everyone
In order for it to merit serious consideration, you should be:
- A participant in a defined benefit (DB) plan
- Healthy enough to qualify for life insurance
- Still several years from retirement
Remember, life insurance premiums will be a function of your age, health, gender, and potentially other factors. All things being equal, the higher your age, the larger your premium. So pension maximization may work best by employing the strategy 5–10 years prior to the retirement age associated with a plan.
The pros and cons of pension maximization
Pro: Flexibility. This can be particularly important if the spouse of the plan participant dies first. When that happens, and a J&S payment option has been selected, the plan participant usually has to "live" with the lower resulting benefit—and no survivor benefit ever being paid. With a pension maximization strategy, however, the participant could continue to draw an SL benefit.
Pro: An inheritance for your heirs. Under a J&S option, the benefit terminates upon the death of the surviving spouse. But pension maximization would provide for any life insurance proceeds left unspent to be passed on to your heirs. And in the event that your spouse predeceases you, your heirs can be named the beneficiaries of the life insurance policy.
Con: The insurance policy must be in force at the time of the plan participant's death. This may seem obvious, but when using this strategy it is vitally important to make scheduled payments so the policy doesn't lapse—or the surviving spouse could be left without a retirement income stream.
Con: If health insurance protection ends when the pension payouts stop, then electing to receive an SL benefit could result in the spouse losing medical coverage when the plan participant dies. If that's the case, the cost of pension maximization could significantly outweigh the benefits, unless the spouse has their own pension with health coverage attached to it.
Pro or Con? Investing experience. Pension maximization may require the surviving spouse to invest the insurance policy death proceeds to get a return that’s as good as the SL benefit that was paid while the plan participant was alive. If the surviving spouse lacks adequate investment experience, it may be wiser to provide for an immediate annuity rather than a lump-sum benefit paid to the spouse.