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MattP

Pension Maximization

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I went to a retirement workshop this week sponsored by Lincoln Investment. One of their topics was Pension Max. They made it seem that for most teachers taking the Max and getting a term life policy is the best policy. In PA we have four options at retirement. Option 2 allows your spouse to receive your full monthly benefits after you die until his/her death. Option 2 has monthly payouts less than the Max Option (payouts are determined by age//etc.). Lincoln's "sell" was to take a portion of the difference and buy term life to protect your beneficiary. Since becoming 403b Wise about a year ago I was skeptical. I did some research and Pension Max has some doubters. Then I listened to this week's Teach and Retire Rich podcast on annuities and it briefly came up. Is this just another case of an "advisor" trying to sell their products?

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Wow! Those sales people never give up. AVOID Pension Max insurance products. Its crap. Purchase a separate term life insurance during working years. In retirement, life insurance is not needed for most people.

 

Thanks Matt for bringing this up. The last time I talked to an insurance agent way, way back 25 years ago was about Pension Max! Never, never mix insurance with your retirement plan or your pension plan.

 

Life insurance is important, as I said and its worth repeating, purchase term life insurance.

 

regards,

Steve

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Matt,

 

What the insurance agent was describing was the strategy of pension maximization (but it seems by your title you knew that!). It is commonly used in the corporate pension world where the personal situation warrants a single life pension and the difference between that pension and a joint life pension is used to purchase life insurance. A lot of the success rests of the personal situation and should be used when the primary receiver of the pension is a lot older than the spouse, or there is long-term doubt over the pension company's financial capabilities. This way, the life insurance portion can provide a large lump sum benefit to the spouse and be used for lump sum funding options. The financial analysis of whether this makes sense is all done by a break-even analysis - if you can make more using the single life and life insurance versus a joint life annuity, then it can work.

 

I don't disagree with Steve's sentiments that some programs are poorly priced and use bad products, but this can be done by purchasing off-the-shelf insurance contracts. In some situations, it can work for your advantage to use this strategy. Whether it works for you in your situation is something that would need to be analyzed.

 

Dave

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Hi Matt,

FYI, I do not understand Dave's explanation. This is the primary problem with almost all insurance products, attorneys are hard pressed to understand these complex products.

Steve

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Steve - next time just ask me to expand on my explanation and I would be happy to.

 

Hi Dave,

I don't want to know. I was talking to the OP to support what he knows already.

Steve

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I agree with Dave that the Pension Max strategy can make sense, but it depends on the difference in the pension payouts (max vs joint) and the health rating you receive from the insurance company. If you get a below average health rating than it will probably make sense to go with the joint life option from your pension instead. I also agree with Steve that term insurance is the only way to go.

 

Example:

  • Max Pension Payout - $61,000
  • Joint Pension Payout - $55,000
  • If you can get a $1,000,000 term policy for 20 years for $2k or $3k it might make sense for you

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