 |
The original idea for pension maximization was simply to allow the retiree to choose the Single Life Only option, to give him or her the maximum income per month. A substantial reduction of as much as several hundred dollars a month in reduced payments could occur for the Joint and Survivor options.
There aren't too many people out there who want to see their income end when they die. A spouse, child(ren), partner, or charity almost always is present. Therefore, the retiree can maximize the income by choosing a Single Life Only income, and buying a life insurance policy with the named beneficiary the family, charity, or partner.
A word of caution: If retirement will be within a few months, or even only a few years, the cost of a permanent life policy may be more than the extra payout from the Single Life Only option. If faced with that situation, one might consider looking for alternative methods of funding the post-death retirement benefit.
Use an asset to fund the life policy. If the retiree has a CD or annuity, and does not need the income from those, a client might consider cashing in and using the money to buy a single premium life policy. This might be an option, because people often have an inheritance, or other sum of money that they saved. Instead of wasting it, we can put it to good use for them.
Buy only the balance needed. If other insurance is owned, and not earmarked for another need, subtract it from the balance needed, and consider buying additional life insurance for the difference. The house and other bills may be paid off now, and the children are through school. The only two needs left might be pension maximization and estate transference. Proper planning is key in this area.
Buy a lower face amount, then use term insurance for the difference. Keep in mind that a term life insurance policy can be cancelled or converted later. This might also be an idea to consider if the spouse or partner is younger and will have a good pension available for their retirement.
Buy the longest level term policy available. This may look like the best option, but long term might prove to be a poor choice, because after the guarantee runs out, the cost of insurance may increase significantly.
Buy the policy early. This may be the most favorable option available. The idea is to start with the end result in your client's mind. Term insurance is good when the family is young, the need is large, and the budget is limited. Sell the 30 to 40 year old $1 million or two of term, and convert it five or 10 years down the road. Convert it to one of the new permanent policies with a strong no lapse guarantee (NLG).
Here is the scenario:
A family man buys $1.5 million of term insurance when he is 25, to protect his family. He is now 45, and his kids are in college -- pretty much on their own. His mortgage is reasonable, his income is great, and life is good. We convert that entire $1.5 million to permanent life with the NLG feature. Further, we structure his premium payments to end at age 68. He now retires, his bills are paid off, his kids are doing well, and he takes the Single Life Only income option from his pension. He now makes several hundred more dollars a month, and if he dies, his family can take the life insurance proceeds. This is a true win-win situation.
I wish we would have had an NLG option 25 years ago. It would have put a lot more insurance benefits on the books. Using the NLG option, funding for a certain period of time, and allowing a client the freedom to choose the Single Life Only option seems to offer the best of all worlds.
It is easy to assess the need for this coverage. All you have to do is compute the income by using annuity tables for single and joint lives. You then can use your financial calculator to come up with the lump sum needed. Make sure that you use a reasonable factor for inflation. The earlier a client buys this concept, the lower the premium commitment will be.
A few other major advantages to this idea:
1. By using the single life only income option, in the event of the spouse or partner's death, the income is still at maximum.
2. Divorce or dissolving the partnership does not disinherit the future
spouse (or partner).
3. If death or divorce of spouse occurs, the client can cash the policy in, and use it as a supplement to current income, or place the money in a trust for estate tax purposes.
4. Regardless of interest rate and economic conditions, by using the NLG provision, the client has a policy that will be there when it is needed.
Keep in mind, the client may have the option to use the cash value for emergency or opportunity. However, most companies' NLG provision is void if cash is borrowed from the policy. This can be avoided by using a different policy for cash accumulation and access.
A few ideal places to present an informative (as well as lucrative) seminar for this idea are universities, hospitals, and primary/secondary schools. Referrals from these seminars are extremely valuable. All you need to do is get the word out about this idea, and referrals will stream in.
Permanent policies do have a place in the American economy. This has been a great seller for me. I hope that it works well for you too.
Kenneth E. Lindbloom, CMFC, LUTCF, of Lindbloom Insurance Services, has been in the insurance business since 1969. Mr. Lindbloom spent 14 years as an agency owner, six years working for TIAA-CREF, and two years at Davis Life Brokerage.
