United States

Pension maximization (or "pension max")


Pension max is often offered to individuals as a way for couples to more affordably manage life insurance expense. But as with many financial “savings” strategies, there is significant risk involved.  Risk that your life insurance agent may not be aware of or fully disclose. Let’s look at the hypothetical example of Sam and Sue:

Assume Sue is a corporate executive who plans to retire in a few years. She will be entitled to a pension of $150,000 a year for life on a 50 percent joint and survivor basis (i.e., if she predeceases her husband, Sam, he will get $75,000 for the rest of his life). However, if (with Sam’s consent) Sue takes a single-life pension, her annual benefit will be $165,000, though Sam will get nothing if Sue predeceases him.

A life insurance agent proposes a strategy called ‘pension max,’ in which Sue would take the single-life benefit and buy enough insurance for Sam to invest or buy an annuity to ‘replicate’ the $75,000 survivor benefit.

Sue and Sam are intrigued but realize there are issues. For example, because it could be years before Sam has to invest the proceeds or buy an annuity, there is no way to know today how much he would need to securely fund the survivor benefit (i.e., any amount of coverage projected as adequate today is inherently a guesstimate). Meanwhile, the premium for the insurance should be sufficiently less than the after-tax difference between the single and joint life pensions to justify the strategy in the first place.

One way to reduce the cost of the insurance would be to combine some term insurance with some permanent insurance to track the amount and duration of the need. And of course, Sam needs to consider the implications of a divorce after Sue retires or Sue’s outliving the insurance company.

Is pension max worth the risk at the end of the day? Maybe, but since there is no going back from this decision, both parties – especially the potential surviving spouse – need to think long and hard before signing that consent form.

Charlie Ratner

Senior Director

Charlie advises on estate and gift tax, business succession, charitable and life insurance planning. Reach him at charlie.ratner@rsmus.com.

Areas of focus: Private Client ServicesEstate and Gift PlanningWashington National Tax

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