Choosing Between Single-Life and Joint Pension: Is “Pension Maximization” as Good as It Sounds?
By Hook Law Center
If the employee is likely to die first, a joint pension is usually the prudent choice. But some professionals will advocate a strategy known as “pension maximization,” or “pension max.” The strategy involves taking the higher single-life payout and using part or all of the extra income to purchase life insurance. If the employee dies first, the spouse gets a death benefit that, assuming proper planning, is large enough to generate the same income as a joint-and-survivor plan. If the spouse dies first, the worker cancels the life insurance and enjoys the higher income.
Pension max strategies often involve a combination of term and whole life insurance. If only term life were purchased, and both spouses survived beyond the term, additional life insurance would have to be purchased at that time, at an advanced age that would make the insurance quite expensive. On the other hand, it is also expensive to purchase whole life insurance on its own in quantities sufficient to afford the same quality of life as a pension.
In certain cases, a pension max strategy may make sense, but properly weighing the alternatives entails crunching a lot of numbers. When deciding what type of pension plan will work best for you, speak with an experienced estate planning attorney.