Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, September 4, 1995 TAG: 9509060008
SECTION: MONEY PAGE: 6 EDITION: HOLIDAY
SOURCE: MAG POFF STAFF WRITER
DATELINE: LENGTH: Long
One choice is called the single-life annuity. It provides the worker and his or her spouse the maximum monthly income from pension benefits.
But under the single-life choice, the pension benefits stop once the retired worker dies, leaving nothing for the surviving spouse. The spouse must approve of this option before the worker can sign up for it.
The alternative is a joint-and-survivor annuity, which usually comes in several versions.
This provides monthly payments that typically are 10 percent to 30 percent less than the single-life option, according to the Institute of Certified Financial Planners, but which continue for the life of the surviving spouse as well as the worker who earned the pension. The survivor would get 50 percent to 100 percent of the joint-life payment, depending on which plan is chosen.
The critical point is that once the choice is made and the pension payments are set, you cannot change the option. The payments you receive will be based on your decision at the time you retire.
The insurance industry, however, is encouraging many workers nearing retirement to pursue another alternative called pension maximization, or "pension max."
With pension max, the financial planners said, the pensioner takes the maximum single-life payout and uses the difference between the single-life and joint-life payouts to pay monthly premiums on life insurance.
Under this plan, when the pensioner dies, the surviving spouse uses the proceeds from the insurance policy to buy an annuity or invest in a way that will, in theory, replace the lifetime income the joint-and-survivor option would have provided.
This may sound appealing to many people, the financial planners said, but pension max is not right for everyone. "Some experts, in fact, argue that it is right for only a few," the planners said.
James A. Ford, an agent in Roanoke for Northwestern Mutual Life Insurance Co., said he has never sold the product.
Pension max, he said, is "a hot topic" in the industry as a means of selling life insurance. But, Ford said, a study by Northwestern Mutual a few years ago found that the product "didn't work out in most people's best interest."
"When push comes to shove," he said, pension max is not in the best interest of most customers "except in certain limited situations." It all depends on how long the retiree lives, Ford said.
A memo from his company, Northwestern Mutual, said both spouses would have to live well into their 80s to break even on a pension max plan.
The Institute of Certified Financial Planners said pension max will work only if:
nThe insurance premium never exceeds the extra income you receive by taking the single-life option, after taxes are considered;
nThe policy earns enough in dividends to keep the policy in force for the life of the pensioner; and
nSufficient death benefits are maintained to at least equal the amount of money the surviving spouse would have received from the pension.
The planners said pension max may work if the spouse is likely to die before the pensioner. The pensioner would then receive maximum benefits for life, and he or she would have the option of dropping the policy, drawing on the cash values or leaving the death benefits to his or her heirs.
If the surviving spouse dies soon after the pensioner, insurance proceeds may be left for heirs. In such a case, joint and survivor benefits would stop.
And if the pensioner is in ill health, on the other hand, insurance may also be prohibitively expensive to buy.
The institute said that pension max may not be a good choice if the surviving spouse's access to employer health-care benefits depends on receiving survivor's benefits. Some pension plans have cost-of-living adjustments, which can make the joint-life option more attractive than a plan involving the purchase of pension max insurance.
The pension max strategy is usually touted for people nearing retirement, the planners said, but life insurance premiums tend to be quite high for people at retirement age. Be certain that you are insurable before committing to this strategy.
If insurance can be bought years before retirement, the planners said, the premiums will be lower.
You won't receive the extra income from the single-life annuity until retirement, however, so it means many people would have to budget to pay the premium out-of-pocket at the same time they may still be struggling with mortgage payments and college costs.
The planners advised that the numbers also may suggest that it is better to sock away more money in a tax-deferred retirement plan instead of buying insurance.
The decision to use or not to use pension maximization should depend on the merits of each situation, the financial planners said.
Northwestern Mutual said the prospects for pension max are best the younger and healthier the worker, the sicker the spouse and the greater the reduction from single to joint payment. The difference in the latter must be more than 30 percent, Northwestern Mutual said.
The pension plan also must lack spouse health benefits and cost-of-living benefit increases.
"In the majority of cases," Northwestern Mutual said, "people could end up paying much more in premiums than they will get back from an enhanced pension payment plus cash dividends."
The company suggested that the plan is a reason to hang onto insurance purchased earlier in life rather than a reason to buy new insurance at retirement.
by CNB