BENEFITS OF PENSION MAXIMIZATION FOR YOU

The defined benefit pension plan such as that available to those covered under the NYS Pension System is a highly desired asset. For many families, this pension (or these pensions for a two pension household) will be a significant portion of the household’s retirement income. Because this pension is so valued, there is often a desire to protect this benefit for one’s spouse or children should the Pensioner die prematurely. The tradeoff however is that a significant amount of the retirees earned pension will have to be given up to provide this benefit.

What if there was a way to protect your loved ones, but keep what would have been a significant reduction in your pension on your own balance sheet? Below are some of the potential benefits to the individual pension holder who utilizes the Pension Max strategy as opposed to taking survivorship benefits and reducing their pension.

1. First and foremost, a properly designed Pension Max strategy should give the loved one an equal or greater level of protection compared to an equivalent survivorship option. It is important to understand that both survivorship benefits and a pension max strategy can be designed to equally protect a loved one.
2. When you elect a survivorship benefit, after 30 days (within the NYS Pension System) your election is final, you cannot change this. The reduced pension you will receive is permanently locked in (there are some exceptions with the more costly pop up options). The Pension Max strategy also comes with a cost but the difference is that the premiums paid for a permanent life insurance contract may be available to access in the future in the form of cash surrender value. NYS is never going to come back and say, “Well John, we see you have made it to 80 years old, so we would like to go ahead and refund you the pension reductions you paid because it turns out you have paid for a benefit you have not needed to this point”. With a properly designed permanent life insurance contract, you can have the option to access cash surrender value in the form of a loan or a distribution. This money can be utilized to supplement retirement, pay for a grandchild’s education, or cover household renovations, as examples. The point is you have equity that can build in the contract thereby providing access to additional funds in the future.
3. Many permanent life insurance policies now come with something called Accelerated Living Benefits. It is important to check with your agent or advisor and reference the policy or NAIC illustration, but Accelerated Living Benefits may provide access to the death benefit while you are living for qualified medical reasons such as cancer, heart attacks, strokes and many other conditions. Many retirees are concerned about a long-term care event. If eligible and properly designed, a life insurance contract being utilized to maximize one’s pension can also double as a future pool of money to provide for potential future long-term care costs. It is important that you work with a licensed insurance agent who has a deep understanding of both policy design and policy benefits as well as pension maximization and your pension system.
4. The actual cost of protecting your loved one utilizing life insurance may be more cost effective than taking a survivorship reduction in your pension. There are many factors that impact pricing such as age, health, beneficiaries age, and size of pension, as examples. This is why it is so important to speak with an expert who specializes in Pension Maximization. It is important to work with an Advisor who can set aside their own personal motivations to help you navigate through and the best choice for you.
5. Related to number 4 are the actual calculations the defined benefit plan is required to make. The Employee Retirement Income Security Act (ERISA) mandates that all pension plans offer a survivorship benefit. From an actuarial perspective, the pension plan cannot discriminate. Meaning, they have to offer the survivorship option to everyone regardless of health. If you are an individual in very poor health, or even terminal, this survivorship option offered through your employer’s plan can be an amazing deal. However, if you are a generally healthy person, the cost of taking a reduction in the form of a survivorship benefit may be extremely expensive. There is a term used by actuaries called “adverse selection”. To apply it to the survivorship options available through your pension, the exact people (the very sick individuals) who the plan would not want to take a survivorship benefit, are the first to take these benefits, and therefore the plan must account for this phenomenon. Those in poor health are often the first to choose a survivorship benefit by reducing their pension because they may not be able to purchase an individual life insurance contract privately. Life insurers have the right to accept, deny, or otherwise rate individuals who apply for life insurance with their company. It is this ability of private life insurance companies to evaluate and discriminate based on health that may make the pricing more competitive.
6. Many pensioners have children and grandchildren. With the possible exception of period certain survivorship reductions, only one named beneficiary can receive a deceased Pensioners pension. This leaves other beneficiaries such as children and grandchildren without any residual benefit. Although an extreme example, the following illustrates an example of this: If a pensioner and their spouse were to both die in a car accident, all the previous survivorship pension reductions would have been paid, but the children or grandchildren would not benefit because the spouse of the pensioner also passed. Although this is an extreme example, there are many examples of spouses dying within close proximity and another beneficiary cannot receive the benefits of the retirees pension if they were not named originally. With life insurance, contingent beneficiaries can be named, ensuring that a loved one or charity receives the tax-free death
   benefit.
7. Survivorship options within a pension traditionally only allow for one beneficiary. Many Pensioners have a desire to leave their pension to multiple individuals such as children, or to a spouse and children. The pension max strategy allows you to name multiple beneficiaries and change these overtime.
8. The survivorship pension going to the beneficiary is taxed. The lump sum death benefit (or series of payments) used in the pension max strategy can be accessed tax-free (it is always important to consult a tax expert for tax advice).
9. NYS gives an additional NYS tax benefit to individuals who receive a NYS pension. If you remain living in NYS, you will pay no state tax on your NYS pension income. If you choose to take a reduction in your pension to protect a loved one, you are giving up a NYS tax benefit. If you maximize your pension by purchasing a properly designed permanent life insurance policy, not only will you maximize your NYS tax benefits, but you can also create a Federal AND NYS tax-free death benefit for your loved one.

BENEFITS OF PENSION MAXIMIZATION FOR YOUR SPOUSE

Whether you elect to take a pension reduction, or choose to Maximize your Pension, central to each of these strategies is a desire to protect a loved one, usually the pensioner’s spouse. Both the pension reduction and a properly designed life insurance policy should equally accomplish this.

The question, however, has to be what is the cost for this? What are you giving up by electing a pension reduction as opposed to privately protecting your loved ones through a properly designed permanent life insurance contract? The following are potential benefits for a spouse.

Many pensions have no cost of living adjustments and others may offer very limited cost of living benefits. Based on inflation, a pension payout elected at age 55, 60, or 65 will not have the same purchasing power when your spouse is age 75 for example. By Maximizing your Pension and purchasing a permanent life insurance policy, the income a set death benefit can provide will grow greater and greater the longer you both live. Or another way to say this is the pension maximization strategy gets better and better the longer you live, where the pension reduction strategy often results in a loss of purchasing power for a set income.

Spouses tend to look at all of their assets collectively. The equity that builds up within a permanent cash value life insurance policy can benefit both the Pensioner and their spouse. This can allow for future trips or to cover expenses such as home repairs.

Many couples have children and eventually grandchildren. The pension reduction option to provide a survivor benefit through NYS for a spouse does not allow for the benefits of one’s pension to pass beyond the surviving spouse. When a NYS Pension participant and their spouse learn that their pension payments could be captured by the nursing home, hospital, or state, leaving the spouse with little to no income to support their family’s existing lifestyle, they traditionally become very interested in the pension max strategy.

A pensioner's pension cannot be protected within a trust. If the pensioner requires long-term care in the future, their pension payments may not  be protected from nursing homes or hospitals for example. Life insurance is commonly placed within a trust which when properly set up, can provide additional protections for the spouse should the pensioner require future long-term care (this not intended to be legal advice, consult with a licensed attorney to obtain legal advice).

If a life insurance company evaluates a NYS pension participant at a standard rating or better and approves a significant death benefit, they are indicating that they believe the insured will live a long time. Many couples live well into their 80s, and more commonly into their 90s. The income you need when you are in your later retirement years tends to be a lot less than when you are in your active retirement years. As the pensioner and spouse grow older they can add multiple beneficiaries which allows the spouse to be fully protected for their income needs, but leave a tax- free death benefit for the children while a parent is still living.

Many NYS participants do not find out about pension maximization until they get close to retirement. However, many younger NYS participants are learning about the pension max strategy. If properly funded, a permanent life insurance policy can be paid up at retirement, which will allow the spouse to be protected should the pensioner die earlier than expected, but also enjoy a greater income throughout retirement.

BENEFITS OF PENSION MAXIMIZATION FOR YOUR KIDS

NYS pension participants tend to think of their pension in the form of a monthly payment, they often don’t think of them in terms of a lump sum. On the other hand, individuals who don’t have pensions but instead have retirement vehicles like 401(k)s, 403(b)s and IRAs tend to think of their retirement vehicle in terms of a lump sum as opposed to a monthly income. It should be no surprise then that they look at their benefit for their beneficiaries in a very different way as well.

If an individual had $1,000,000 in a 401(k), do you think they would be ok with passing away and having their children get nothing? Probably not. A survivorship benefit elected through the NYS pension plan allows for income to go to only one beneficiary, usually the spouse. By utilizing the pension max strategy and instead purchasing life insurance to protect your spouse, any benefit left after both parents have passed can go on to their children. Because NYS pension participants do not think of their pension as a lump sum, and because education among the NYS pension participants is often lacking, many participants will retire, elect a survivor benefit, and never learn that they could have protected their spouse and also left a significant tax-free death benefit to their children and/or grandchildren.

Another benefit for children is they often tend to be the advocates and even care takers for their aging parents. A pension max strategy utilizing a permanent life insurance contract with Accelerated Living Benefits can provide benefits for a critical or chronic illness. These funds may provide significant additional tax-free dollars while the pensioner (the insured) is still living. These dollars may not only lead to better care for the parent (pensioner) but also provide relief for the child who will have greater resources to help advocate and care for their parent.

BENEFITS OF PENSION MAXIMIZATION FOR YOUR LEGACY

Whether or not a pension holder takes a significant reduction in their pension to protect a loved one or takes their maximum pension and instead purchases a permanent life insurance policy to protect a loved one, either way, there will be a cost for this. There are many advantages to a pension max strategy but at it’s base, it is about protecting loved ones while leaving a legacy.

As a NYS employee, you will have to sign a document that becomes permanent after 30 days. The choice you make will impact you and your loved ones for the rest of your life. Can you confidently say that you feel comfortable that the choice you make will be the best choice for your entire retirement? The pension max strategy, gives you great flexibility to protect those that you love, and also make adjustments as your life and the lives of those you love evolve.

The legacy you leave your family, and/or possibly organizations you support like your church or charities, is within your control when you implement a properly designed pension max strategy utilizing permanent life insurance.