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Pension maximization is a retirement planning technique recommended to some retiring couples, depending on their circumstances. People who choose this option have a single life annuity on the older spouse, setting aside part of the proceeds from the annuity to fund a life insurance policy. When the older spouse dies, the life insurance is used to provide a retirement income for the younger spouse. People considering this option should review their choices carefully and ask an insurance agent for a detailed breakdown of the available retirement funding choices.
The idea behind pension maximization is that when people select a single annuity, rather than a joint annuity with survivor benefits, the monthly proceeds of the annuity are higher. The couple can set aside the extra income from the annuity to pay for the life insurance policy, and the survivor benefits will be higher with the life insurance than they would be on the annuity. On the surface, pension maximization can seem like a good idea for couples preparing to retire.
There are some drawbacks to the plan that must be considered. In some cases, the excess from the annuity might not be enough to fund an adequate life insurance policy. Setting up such plans for couples who are shortly to retire may also not be in their best interests because there may not be enough time to fully fund the annuity. If the younger spouse dies first, the life insurance policy can be canceled, but the payments already made cannot be recovered, and represent a loss to the surviving spouse.
When evaluating retirement options and thinking about pension maximization, it is advisable to ask a life insurance agent for a cost and benefits breakdown for using this tactic in contrast with taking on a joint annuity with survivor benefits. Couples may also want to consider their age, proximity to retirement, and general level of health, as these can all be factors in choosing the best way to fund retirement. Another issue can be benefits offered through a workplace, as it may not always be possible to choose the payment format for retirement benefits.
People who choose pension maximization should make sure their contracts with the insurance company are detailed and complete. They should check for potential problems in the contract, including circumstances where the life insurance policy will not be paid out. If one of these situations arises, it is possible that the surviving partner might not be able to receive benefits, and could be left without funds for retirement.