Pension maximization is a retirement strategy using life insurance to maximize your pension.
The concept is to take the maximum pension available and buy a life insurance policy.
The life insurance policy replaces the pension benefit that ends if you die before your spouse.
Pension Benefits
When you retire with a pension, you have a choice to make:
Single Life Benefit – You get the maximum monthly benefit now, but that benefit ends when you die.
OR
Survivor Benefits – You receive a lesser monthly benefit, but your spouse will continue to receive a monthly pension if you die before them.
And the difference between those two payouts can be significant!
Pension Max Life Insurance – How it Works
How much pension max life insurance do you need?
The following is needed to calculate your pension life insurance needs:
- Your current age
- Retirement age
- Your life expectancy
- Your spouse’s age
- Your spouse’s life expectancy
- Monthly pension benefit if you elect the maximum pension
- Monthly pension benefit if you elect joint & survivors benefit
You should understand that several assumptions have to be made to calculate this need…It’s not an exact science.
Pension maximization assumptions include:
- Life Expectancy – How long are you and your spouse going to live?
- Inflation Rate – What inflation rate do you expect now and in the future?
- Investment Rate of Return – What rate of return is reasonable if you invest the life insurance death benefit?
- Life Insurance Cost – You won’t know your rate until you get approved for coverage.
Here’s an example:
Let’s assume you are a 65-year-old male, and the life insurance needed is $250,000.
The Social Security Administration says your life expectancy is 18.09 years.
Questions you need to think about include:
- How’s your health?
- What does family history longevity look like?
- Do you buy life insurance just to cover the 18.09 years?
- Or do you want a cushion if you and your spouse live longer?
- Do you buy a policy that lasts as long as I live or a term policy?
- Should you look at getting both the term life and universal or whole life?
More on this in a minute, as your current health is a factor when buying pension max life insurance.
How Does Your Health Affect Pension Maximization?
The more significant your health issues are, the more expensive life insurance will be.
At a certain point, the cost of life insurance may make pension maximization less attractive than taking the survivor benefits option.
We can look at your existing group life insurance if needed, but that is not usually an excellent option either, given the price when you leave.
Here is an example of life insurance pricing based on various underwriting rate classes. After this chart, you’ll find examples of how certain health conditions are typically underwritten.
Male Age 65 – $250,000 of coverage – Monthly rates for a non-smoker
| Underwriting | 20-year term | 25-year term | Lifetime |
|---|---|---|---|
| Preferred Best | $195 | $346 | $478 |
| Preferred | $228 | $366 | $492 |
| Standard Plus | $288 | $416 | $596 |
| Standard | $363 | $515 | $613 |
| Table 2 Rating | $429 | $773 | $920 |
| Table 4 Rating | $769 | $1030 | $1226 |
| Table 6 Rating | $961 | $1288 | $1533 |
| $6 Flat Extra | $520 | $650 | $748 |
| $7.50 Flat Extra | $553 | $684 | $782 |
Female Age 65 – $250,000 of coverage – Monthly rates for a non-smoker
| Underwriting | 20-year term | 25-year term | Lifetime |
|---|---|---|---|
| Preferred Best | $134 | $277 | $400 |
| Preferred | $164 | $303 | $410 |
| Standard Plus | $187 | $346 | $491 |
| Standard | $232 | $431 | $506 |
| Table 2 Rating | $348 | $647 | $759 |
| Table 4 Rating | $464 | $692 | $1012 |
| Table 6 Rating | $580 | $1078 | $1265 |
| $6 Flat Extra | $367 | $481 | $641 |
| $7.50 Flat Extra | $401 | $515 | $675 |
Some examples of health conditions and their typical underwriting outcome:
- Preferred Best – About 10% of the population get this rate at the age of 65
- Preferred – No history of health issues other than controlled blood pressure and cholesterol
- Standard Plus – BMI – low 30’s, type 2 diabetes with 7.0 A1C, sleep apnea,
- Standard – BMI above 35, stage 1 cancers – melanoma, thyroid, prostate
- Table 2 – Type 2 diabetes w/ 7.1 – 8.0 A1C, single vessel stent, TIA history
- Table 4 – Cardiac bypass history, type 1 diabetes controlled, combinations of impairments
- Table 6 – More significant cardiac, hepatitis, and combinations of impairments
- $6 and $7.50 Flat Extras – Are used for cancer histories – Some stage 1 and most stage 2 cancers
As you can see, your health will be a critical factor in determining if pension maximization life insurance is right for you.
Pension Maximization Life Insurance Products
You have a choice of pension maximization products, including:
- Term Life Insurance
- Universal Life Insurance
- Whole Life Insurance
Each type of life insurance product has its advantages and disadvantages.
Term Life Insurance
In today’s marketplace, a 65-year-old can get a 20 or 25-year term policy, and a 67-year-old can get up to a 22-year term life insurance policy.
The advantage of term life insurance for pension maximization is that it offers the least expensive pricing compared to universal or whole life.
The disadvantage of term life insurance for pension maximization is that pricing will increase at the end of the 20 or 25-year term.
And if you outlive your term and your spouse still needs the pension when you die, they can end up as a GoFundMe campaign.
And with some companies’ products, the death benefit decreases at the end of the term.
Universal Life Insurance
You can choose from cash value accumulating policies to no lapse guaranteed death benefit policies.
The advantage of universal life insurance for pension maximization is that you can get a policy guaranteed to age 120.
The disadvantage of universal life insurance for pension maximization is that cash value accumulation policies may not be guaranteed.
You can run into problems in the future that require increased premiums.
Whole Life Insurance
Whole life insurance policies for pension maximization are available.
A potential advantage of whole life insurance is that you can buy a policy that may pay dividends in the future that help reduce your premium outlays in future years.
A disadvantage of whole life insurance for pension maximization is that dividends are not guaranteed.
You can end up with a policy that does not perform as projected and have to pay additional premiums into your policy.
Final Thoughts
Pension maximization is excellent if the numbers make sense for your situation.
We can help you with your pension max questions.
We’ll walk you through the options available, explain the differences, and provide guidance to make an informed decision.
With our service, there is never any pressure or obligation.
