You are retiring and want to “get the most out of your pension“.
So let’s say you’re company gives you a choice — You can take your pension in the form of an annuity either as a single life annuity, which will pay you $5000 per month for as long as you live, or as a joint life annuity, which will pay you and your spouse $3700 per month for as long as you both live.
Which one makes more sense, and what role can life insurance play in this decision?
Factors that Come into Play with Single vs. Joint Life Annuity Decisions?
Well the first thing to consider is your age and health, as well as the age and health of your spouse.
If you’re both in excellent health, no medications, no major medical problems, taking an annuity payment over your lives probably will make more sense than a lump sum payment. If you’re both in poor health, the lump sum payment may be the way to go.
You may even want to speak to your doctor about your health and ask him/her to assess your life expectancy, which will help you pencil out the numbers. Of course it would be a best guess, but this decision you have to make is an exercise of assessing your probabilities and choosing the best option.
Using Life Insurance with Single Life Annuity Payout
If you want to bring life insurance into the picture, you have to first determine how much of a lump sum would your wife need to provide the income. If she’s in good health, she has a life expectancy of approximately 25 years. A quick single premium life only annuity quote tells me a 59 year old will need about $890,000 to provide her with $5000 per month for the rest of her life on a guaranteed basis.
So in this case, you could take the higher payout of the single life annuity at $5000 per month, and buy a $890,000 policy guaranteed to age 110 for $1066 per month with Genworth Life & Annuity Insurance Co., and in essence, you still have a guaranteed joint life annuity payout, but you would end up with $3,934 per month rather than $3700.
This strategy is commonly known as the “Pension Max” in life insurance circles.
In reality, you probably wouldn’t need a policy that expensive anyway. What I would actually recommend would be to split up the $890,000 between 3 policies at a 10 year term, 20 year term, and another to age 110. That’s because if you lived 20 years, your wife wouldn’t need the entire $890,000 to replace this income, since her life expectancy would be much lower at that point. Splitting the policies up like this would cost much less and make the arbitrage much more attractive.
For help determining whether or not life insurance can be used in your single, joint, or lump sum annuity payout, call us at 877-443-9467.*Huntley Wealth Insurance and its representatives do not give legal or tax advice. Please consult your own legal or tax adviser.