Comparing Retirement Income Payment Options

When approaching retirement and the last decade of stock market ups and downs, many people wonder how to protect retirement income from economic collapse.  There are two popular options to protect retirement savings:  Joint and survivor annuity payment option or retirement income protection funded with life insurance.

Joint/Survivor Annuity Payout Option Versus Retirement Income Protection Funded with Life Insurance

With a joint and survivor annuity payout option, a reduced pension benefit amount is guaranteed while both partners are living.  With a defined benefit plan funded with life insurance, the full pension benefit is received.  However, there is a cost for life insurance protection.

If the pension owner dies first, under the annuity payout option, the spouse is guaranteed to receive an amount equal to all or a percentage of the pension benefit.  When income is protected with life insurance, the spouse can use the income-tax-free death benefit to provide a lifetime income.  Basically, this method uses life insurance to replace pension income.

When a spouse dies first, if the initial pension amount chosen was the reduced amount to allow for the spouse to continue to receive income, the pension owner is now locked into a lower rate for the remainder of their life, no matter the present lump sum value of the pension.  If life insurance along with a full pension payment is chosen initially, if the spouse dies first, the pension owner continues to receive the full pension amount.  An additional benefit is that the policy owner can choose to continue paying the life insurance premiums or use any cash value to provide additional retirement income.

In a financial emergency, with income from a pension, money cannot be withdrawn.  Pension owners are locked into a fixed monthly or yearly amount.  With life insurance, a policy owner can borrow or withdraw any available cash value from the policy.  However, it should be noted that any withdrawals and loans will reduce the policy’s death benefit and cash value.

With a pension, children or heirs will receive nothing when a retiree and spouse die. With a retirement income protection life insurance policy, a spouse can be named as a beneficiary, then when the spouse dies, the children or other heirs can be named as beneficiaries.

A properly designed retirement income protection plan using life insurance allows a retiree to take the full pension benefit, retain control and flexibility, and assure that a spouse is taken care off upon the retiree’s death.  The policy must be kept in force by premium payments.

Types of Cash Value Life Insurance   

There are four types of cash value life insurance policies:  whole life, universal life, variable life insurance, and variable universal life insurance.  The primary differences in the types of cash value life insurance falls into three main categories:  fixed or flexible premiums, responsibility for investment decisions, and benefits that are guaranteed.  Which type and category to choose will depend on the individual’s needs and goals during retirement.

Whole Life Insurance

With a whole life insurance policy, a fixed premium is paid by the policy owner.  The cash value of whole life insurance accumulates at a guaranteed rate of return.  At the death of the policy owner, the insurance company pledges to pay a guaranteed death benefit.  In addition, policy dividends may be payable.

Universal Life Insurance

A policy owner of a universal life insurance plan, also known as adjustable life insurance, can increase or decrease premium payments in addition to selecting from a flat or increasing death benefit.  The cash value of universal life insurance is dependent on either current interest rates or are tied to a stock market index.

Variable Life Insurance

A fixed, level premium paid by the policy owner with a choice of different investment options that accumulate cash value are a couple of the benefits of variable life insurance.  There is generally a minimum guaranteed death benefit.  Additionally, the potential for higher death benefits is dependent on the performance of the investment options selected.  Cash value is not set at a particular rate.  Instead, the cash value depends wholly on the performance of the investment options selected by the policy owner.

Variable Universal Life Insurance

By combining variable and adjustable life insurance, a policy owner can receive a guaranteed minimum death benefit.  This is dependent on maintaining a minimum premium payment schedule.  The cash value accumulations are gained from the investment options and are not guaranteed.  Instead, a higher death benefit and cash value is dependent on the performance of the investment options chosen by the policy owner.

A licensed financial adviser can discuss the specific cash value life insurance policies that will work for a particular situation.  Product features, benefits, risks, charges, and expenses should be discussed and understood before a life insurance policy is chosen.

Retirement Income Protection Action Checklist

Before choosing a retirement income protection plan, a potential policy owner should analyze the risks associated with retirement income protection, such as:

  • Ensuring retirement income is sufficient to continually pay for the life insurance premiums so that coverage stays in force for the lifetime of the policy owner.
  • Cost-of-living adjustments (COLA) in a pension plan should be reflected in an upward adjustment in the amount of life insurance purchased.
  • Health insurance benefits for a surviving spouse might end under some pension plans if the life income annuity payout option is selected.

Finally, careful calculation of the amount of life insurance needed to continue the desired income for the surviving spouse should be discussed with a highly-qualified financial expert.  All potential life insurance policies should be carefully considered.  Understanding the underlying funds’ investment objectives, risks, charges, and expenses vary from policy to policy and can have a major effect on the income of a couple and a surviving spouse.

As with all financial decisions, planning and research will ensure that the best decisions are made for the protection of retirement income.  Ultimately, the best retirement payment income option will be based on an individual’s particular needs and desires.  

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