Pension Maximization

What Is Pension Maximization?

Pension maximization is a retirement strategy for couples that involves opting for the highest possible annuity payout for one spouse's lifetime while obtaining life insurance to provide income for the surviving spouse.

Pension maximization involves the use of two retirement income products: a life-only annuity, which will offer the highest cash payout for one individual but stops when that individual dies, and life insurance, which can provide income to the surviving spouse.

This is a risky strategy. Retirees may choose a safer joint-and-survivor annuity, which guarantees a benefit for life to both spouses.

Understanding Pension Maximization

The higher payout of a life-only annuity can be attractive for some couples, given that the risk of such a strategy may be reduced with a life insurance policy. The reasoning is that the increased payout of the life-only annuity may provide more than enough extra income to pay the premiums of the life insurance policy. There are, however, many details to consider.

Couples who participate in an employer pension plan may consider pension maximization. Insurance agents may suggest a strategy to couples for whom the pension annuitant is in good health or if the couple has other sources of income to balance the risk of choosing a life-only annuity structure.

Using a pension maximization strategy can be risky, especially if the annuitant dies before their spouse. It is important to ensure your life insurance policy has enough of a death benefit to compensate for the pension loss.

The longer the higher payments of such an annuity are made, the more profitable it is for the couple. However, if the individual who is due the pension is likely to die first, then a joint pension or joint-and-survivor benefit may be the best choice.

Pension Maximization Reasoning

With pension maximization, if the annuitant dies first, the surviving spouse will receive a death benefit from the life insurance policy that should be enough for the survivor to purchase a guaranteed fixed annuity. This could have a better monthly payout than the survivor would get with the safer joint pension/joint-and-survivor annuity option.

In the event that the spouse who is not covered by the pension dies first, the surviving spouse can cancel the life insurance policy and continue to receive the higher life-only annuity payment.

It should be noted, however, that payments from the guaranteed fixed annuity would be fully taxable at the capital gains rate while the payments from the safer joint-and-survivor annuity would be mostly tax-free. 

Special Considerations

There are many important factors to consider before attempting this strategy, including the health of both spouses, other sources of income, the tax implications, and the specific terms of the couple's pension or medical plan.

The key to success with pension maximization is protecting the surviving spouse by providing them with a sufficient income in perpetuity. Since such a strategy can be complicated and should be discussed with a licensed insurance professional, financial planner, or financial advisor.