Participant and spouse choose the single
life income benefit payment options rather than the joint and survivor benefit payment option as
his or her payment options for the defined benefit pension plan.
The Participant has an interest in a defined
benefit pension plan.
Upon death of the Participant, the life
insurance death benefit is paid to the Participant's spouse income tax-free.
The Participant purchases life insurance
on his or her life to replace the income list to the Participant's spouse when the single life income
benefit payment stops.
Upon the Participant's death, the pension
benefits stop. Life insurance death benefits can be used to replace the discontinued pension income
lost to the Participant's spouse.
In the typical defined benefit plan, the Participant is usually given the choice
of a single life or joint and survivor benefit payment option. In most situations, the benefit
paid on the joint and survivor option is reduced by 1/3 to 1/2 from the full benefit otherwise
available with a single life payment. The selection of a benefit payment option is an important
planning consideration. Both the Participant and the Participant's spouse must make the irrevocable
election of the single life benefit payment option.
The single life benefit payment option provides a higher benefit payment
than the joint and survivor benefit payment option but leaves the spouse without continued benefit
payment when the Participant dies. On the other hand, of the joint survivor option is chosen, an
income is guaranteed to the spouse when the Participant dies, but if the spouse dies permaturely, the
Participant is left with reduced benefits for the rest of his or her life. In either situation, the
heirs generally receive nothing from the pension plan. The pension maximization strategy attempts to
provide a possible compromise solution to this "no-win" situation.
Pension Maximization ("Pension Max") is a strategy for getting the most out of
defined benefit plan annuity payment options. For the client who will receive defined benefits at
retirement and must choose a single life or joint and survivor annuity, Pension Max may be a viable
planning option.
Prior to retirement the Participant purchases a life insurance policy on the
Participant's life and names his or her spouse as the beneficiary. The death benefit applied for would
approximate an amount needed to provide the pension income that might be received by the Participant's
spouse should the joint and survivor benefit payment option be selected. The Participant then selects
the single life benefit payment option at retirement. This provides a larger benefit payment while the
Participant is alive. When the Participant dies, benefits from the pension plan cease. The life insurance death
benefits are paid to the Participant's spouse generally income tax-free and estate-tax free.
This death benefit can also be used to provide the monthly income lost to the
Participant's spouse because the pension benefits are no longer payable. Upon the death of the Participant's
spouse, any remaining insurance death benefits may be left to the spouse's and insured's heirs.
At the Particpant's death the life insurnance death benefit replaces the
discontinued pension income to the Participant's spouse.
The Participant's spouse receives death benefit proceeds generally income tax-free
and estate tax-free.
Upon the death of the Participant's spouse, the heirs will receive any
remaining life insurance death benefit.
Spouse medical benefits may be tied to survivor pension benefits.
Election of a Life Only option may eliminate those survivor medical benefits. Careful
review of the related retirement benefits is needed before adopting this option.
The surviving spouse may have little or no investment experience and may
deplete a lump sum death benefit well in advance of the life expectancy. Careful review of the
settlement options offered by the life insurance policy with your financial advisor is recommended.
