Should I Use My Pension or Buy Insurance?

[csalter]

I placed this question on Bogleheads and they thought I was an insurance agent. I had to explain that I was just a regular consumer. Anyhow, since this is an actual insurance forum, I thought I would ask folks here since you probably are more familiar with pension maximization.

Here is my scenario. Should I buy life insurance or take out one of the joint survivor options when I retire. I have about 10 years to go and want to make sure that my wife and I will be able to live comfortably in retirement. I am 52 and she is 38 She has about $90,000 in her 401k and IRA's combined. I have about 40K in mine. We have a home valued about $500,000 in today's market and my mortgage still have 20 years on it. We both have longterm care.
Should I buy life insurance or take out one of the joint survivor options when I retire. Here are the numbers. If I take out the single annuity option I would receive $9786/month or $117,432/year. I have 3 options to provide my wife with a joint survivorship benefit. I can give her the 100% option where we would both get 7861/mo or $94,332/year. Or the 75% option where I would get 8383/month or $100,596 and she would receive upon my death $6287/month or $75,444 or I can choose the 50% option which would give me $8828/month or $105,936 and she would receive upon my death $ 4414/month or $52,968/year. My pension has a 2% simple benefit adjustment factor that they provide each year. It is not a compounding COLA. However, they do make adjustments to ensure that they purchasing power of the pension stays at 80%. I understand what that means, but don't know the specifics. It is documented though.

I have read about pension max, but I am not sure if it would be a good thing in my situation or not. I want to make sure she is ok. If I reach 75 should would only be 61 so she will have quite a few years left maybe 25, 30 or more. Taking the single annuity seems like a great idea but not a wise move for her. Sure I would save $23,000 a year if I did that but I don't think I can get an insurance policy that is going to provide her with the kind of income she could get from one of the options.

I would like to know your thoughts on this. I have been approved for a guaranteed premium no lapse UL policy with AVIVA for about almost $600,000. I need life insurance any way in case something happened to me tomorrow. I would use the 10 pay of $1000/month to pay it off right at retirement. I would choose option 3 and give her the 4414/month or option 2 the 6287/month. I will let her contribute the max to roth iras first and then whatever she can to her 401K. I contribute the max to a roth ira as well. My wife will probably work until I am able to reach 65 so we won't have both of us needing to pay for medical insurance.

My other thought is taxes. My pension will will have her taxed to death when she is single with no kids. (Of course, if I kick the bucket early on she will more than likely have a new boyfriend. :-) ) I am thinking that the roths building up, the life insurance not being taxable except the interest on its earnings that she should be ok. If the plan were to go well she would only have to worry about the mortgage and my pension with either option would cover that each month after taxes. She would have no monthly bills unless she created them.

The other side of this is should I just take the first option take the $92,333/year and know that she will get the same and forgo the life insurance and just invest that $1,000/month premium for ten years?

I get sick thinking about it.

 

[somarco]

Life insurance proceeds are free of any income taxes, pension payouts are (generally) not.

In most cases, pension max beats the annuity options almost every time.

 

[Guest]

I specialize in Federal Employee Retirement . Pension Max would be a perfect situation for you!! Life ins proceeds is tax free, if you do the survivors option, you end up wasting your money if your wife dies first. With Life ins, you can have a cash value policy that you can surrender if your wife dies first.

If you kick the bucket , then your wife can enjoy the money tax free. The question is always, who dies first...? if you cant answer this question then life ins is a better buy.

Love to run you scenarios......

hope this helps.

 

[csalter]

I specialize in Federal Employee Retirement . Pension Max would be a perfect situation for you!! Life ins proceeds is tax free, if you do the survivors option, you end up wasting your money if your wife dies first. With Life ins, you can have a cash value policy that you can surrender if your wife dies first.

If you kick the bucket , then your wife can enjoy the money tax free. The question is always, who dies first...? if you cant answer this question then life ins is a better buy.

Love to run you scenarios......

hope this helps.

I am just not sure of what the right decision would be because I think the insurance would be expensive for my age. I also worry about my wife managing the money to maintain it.

 

[ltcadviser]

Life insurance proceeds are free of any income taxes, pension payouts are (generally) not.

In most cases, pension max beats the annuity options almost every time.

That is definitely not a true statement, today. Pension Max opportunities will depend upon the age and health of the applicant. If the pension offers a Pop Up option, an important advantage of pension max planning is negated. Anyway each case needs to be analyzed individually. I ran a pension max comparison last month and our only opportunity was if we could get approved at preferred best; otherwise the annuity was preferable.

 

[MGAlady]

There are a lot of choices and it is very overwhelming. Congratulations to you for doing your research and knowing what you have and what some of your options are. Whereas I can appreciate your wanting someone to basically tell you what they would do in your situation or what you should do. My best advice would be to figure out what your goals are. I see:
1) Income for wife
2) Tax shelter/estate issues
3) Interested in Life insurance

Why do you need life insurance? You wrote, you need insurance anyway, why? The Aviva UL for $600k, at what rating were you approved? Are they asking you to transfer a lump sum into the policy? Why 10 pay? Why such extremes? You can accomplish all of your goals without such extremes. You have 10 years before making a distribution decision. There are a few things going on and a plan can be put in place attaching them all together or keeping them mutually exclusive. Without knowing more of the reasoning for the life insurance, it's hard to really advise. Can you provide some more information about what you want the proceeds of your insurance to take care of and we can go from there.

 

[csalter]

There are a lot of choices and it is very overwhelming. Congratulations to you for doing your research and knowing what you have and what some of your options are. Whereas I can appreciate your wanting someone to basically tell you what they would do in your situation or what you should do. My best advice would be to figure out what your goals are. I see:
1) Income for wife
2) Tax shelter/estate issues
3) Interested in Life insurance

Why do you need life insurance? You wrote, you need insurance anyway, why? The Aviva UL for $600k, at what rating were you approved? Are they asking you to transfer a lump sum into the policy? Why 10 pay? Why such extremes? You can accomplish all of your goals without such extremes. You have 10 years before making a distribution decision. There are a few things going on and a plan can be put in place attaching them all together or keeping them mutually exclusive. Without knowing more of the reasoning for the life insurance, it's hard to really advise. Can you provide some more information about what you want the proceeds of your insurance to take care of and we can go from there.

I am trying to do my due diligence now because I don't want to be rushed into making a decision and I feel that if I plan I can possibly save money. If I choose to make a pension option at 55 then we get additional money added to pensions as opposed to waiting until we retire at 61.5. I want to do the 10 pay because it would allow me to have the insurance to be paid off when I retire so I would not have to pay any more premiums. My goal is strictly to ensure income for my wife to replace mine in the event of my death. I am thinking that if I make the decision to buy insurance that it would be cheaper at 52 instead of age 62. Also, insurability is a definite now and I can't predict the future. I need insurance now just in case something happens to me prior to retirement or at least age 55 which is the earliest I can make my pension option. At that time, if I pass the option I chose would go into effect.

I am not looking at putting any lump some transfer into a policy. The Aviva policy is a straight UL guaranteed policy. I am not looking for cash value on it. I was told that was the cheapest permanent policy I could get for my age. I was thinking about taking the 50% and using the insurance as an additional source of income for my wife. I used the difference between the amount I would get at the 50% amount and my single annuity amount to determine amount I would pay for the insurance premium.

 

[MGAlady]

Ok. I am understanding a little better now. I did some quick quotes and $600k guaranteed UL to age 100 for a 52 yr old male at preferred is cheapest with AG, at $5,658/yr. That's with annual premiums for the rest of your life. I understand why you want to do the 10-pay. This indicates that Aviva may not be the most cost efficient. Aviva's Index UL's are great, they will build cash value. Is that the product? Like to like, if the annual premium is less with AG, the 10 pay will be less.

How's your health?

 

[jwb0007]

Hello, csalter,

As you well know, the subject you ask about has many variable responses, and you are wise to be cognizant of all the issues, as they are. The fact is that their complexity exceeds the experience of most advisers.

The correct answer(s)--for you--I'm certain are reachable, however, the process can be very complicated. Most simple and reflexive answers are either wrong or lucky.

FYI, I received my CFP (Certified Financial Planner) certification back in 1990, but I do not practice as a CFP anymore. Frankly, I did not want to have to maintain an inordinate store of very perishable knowledge in order to remain "current".

Anyway, I do understand the human issues as well as the practical ones, such as tax and opportunity cost, time value of money, magnitude and probability of risk, and on and on.

Would be pleased to help if you wish to ask any specific or general questions.

Good luck!

Jim
Edited for spam

 

[csalter]

Ok. I am understanding a little better now. I did some quick quotes and $600k guaranteed UL to age 100 for a 52 yr old male at preferred is cheapest with AG, at $5,658/yr. That's with annual premiums for the rest of your life. I understand why you want to do the 10-pay. This indicates that Aviva may not be the most cost efficient. Aviva's Index UL's are great, they will build cash value. Is that the product? Like to like, if the annual premium is less with AG, the 10 pay will be less.

How's your health?

I received preferred with Aviva. I don't think this is the policy, because there are no cash values. I was only looking for death benefit.