Pension Maximization Using Universal Life Insurance

  • Originally published December 20, 2011 , last updated December 10, 2015

When Darryl Loftus retires this spring from his job at a regional trucking company, he will have an enormous decision to make. Should he opt for the single life or a joint or survivor option on his pension plan? His choice will significantly impact the rest of his and his wife’s financial lives.

Single Life Vs. Joint Survivor

Choosing the single life option would give Daryl a larger pension benefit amount. The downside is that his wife, Kris, would receive nothing if he dies. Typically, the joint survivor option provides a monthly benefit amount around 65 to 75% lower than the single life benefit. The advantage of the joint option though is that the pension will provide the surviving spouse with income.

In Darryl’s case, he will receive $5,000 a month if he chooses the single life, and $3,500 a month if he chooses to cover his wife under the joint survivor option. If you work in the senior market, you have clients who are facing this decision right now. How can you help them make the best decision?

Utilizing a Pension Maximization Strategy can offer your clients the best of both worlds with a solution that allows them to receive the higher pension income, while maintaining the spouse's ability to receive benefits.

How Pension Maximization Can Help

Using the Pension Maximization Strategy, Darryl can take the $5,000 monthly benefit of the single-life option and use a portion of the extra monthly income to buy a life insurance policy with Kris as the beneficiary. If Daryl should ever die, Kris will be able to use the death benefit from this life policy to generate an income stream.

In the end, Daryl can receive a higher income while he’s alive, and the surviving spouse could possibly receive the same monthly income stream as she would have had the joint life option been chosen.

How to Calculate the Death Benefit

1. Identify the joint survivor benefit amount. In Daryl’s case it is $3,500 a month. This is the target monthly income for Kris.

2. Run a single premium immediate annuity (SPIA) quote to find the lump sum needed to create an income stream of $3,500 a month. Run the SPIA quote for the current age as well as several other ages as the single premium needed will decrease as the spouse ages.

3. Run a universal life illustration with a death benefit equal to the SPIA lump sum.

Keep in mind that your case will illustrate better and show a lower premium if the death benefit is lowered as the client's life insurance needs decrease. Here is an illustration using NACOLAH’s Custom Guarantee to execute the Pension Maximization strategy and create an income stream for Kris.

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