One of the best strategies I would use with clients that had pension plans was to have them supplement it with life insurance. There is a very good reason for this for the people that are looking to retire, and are married. Many times when someone retires and wants to start collecting on their pension plans they worked so hard for all their lives they take a reduced benefit so that if they die they will be able to leave their spouse a benefit as well. This is a nice thought, but isn’t there a better way to utilize a pension plan and have more money while you are alive? Yes. Yes there is.
Let’s consider a typical situation of the day when you start collecting on your pension. You may elect to take the reduced benefit of say 70% so that your spouse can continue to collect 40-50% of your pension if you die before they do. Most people elect to get their distributions in this way. For some it is the correct solution, but for many they could just take a 100% distribution for themselves and supplement it with a life insurance policy.
Let’s use some remedial math to look at a situation which would make the most sense for someone collecting on a pension, and qualifies for life insurance coverage. Hypothetically, if you were to take a 100% distribution on your pension you are going to get $1000 a month. So that means if you took only a 70% distribution you would get only $700 a month, but your spouse would get $500 a month after you died until they dies. What if life insurance only cost you $100 a month to cover the need for your spouse after you died? Wouldn’t it make more sense to collect $1000 a month and pay the $100 for insurance every month than it would be to just collect $700 a month? Of course it would! You would still have $900 a month while you were alive instead of $700. Your spouse would also get a big lump sum payment after you died from the life insurance policy instead of the piddly 50% benefit ever month from your pension.
Any financial advisor worth his salt should think of using this strategy for a client that has a pension plan when they will retire. More importantly, you need to think about this a bit before you retire. There is a big difference in the monthly cost of life insurance as you get older. As some insurance agents like to say: “One year older, and closer to death.”. This just means that the risk of you dying to an insurance company is greater the older you are so the cost of the insurance is more. If you get yourself insured younger the premiums will be much lower and you may avoid the unfortunate possibility that you could become uninsurable as you age due to disease, or any other ailment that disqualifies you from coverage.
As always, planning for your retirement starts as early as possible, but when it comes to life insurance as a retirement supplement this couldn’t be more true. If you have a pension plan for when you retire ask your financial advisor about this strategy. I guarantee they will love it since it not only helps you tremendously if all the numbers fall into place, but they make a good sum of money selling life insurance to you so it is a win-win for everyone.