Introduction to Pension Maximization

A life insurance strategy called pension maximization or, sometimes pension enhancement may provide a more attractive overall benefits package for married couples than the normal Joint and Survivor (J&S) annuity option from a qualified plan. The concept is simple. Rather than electing to receive the normal (normal default) J&S annuity from a pension plan, the retiring participant, with the consent of his or her spouse, selects the higher benefit payable under the Single Life (SL) annuity option. The couple then purchases life insurance on the participant to assure the financial security of the spouse in the event the participant dies first and pension benefits cease. The difference between the pension benefit payable under the SL annuity and the lower joint benefit payable under the J&S annuity is available to pay premiums on the insurance.

A fundamental but often misperceived concept is that a J&S annuity is itself a type of insurance. Whenever a couple selects some form of J&S annuity, rather than the SL annuity, they are essentially buying insurance to assure survivor benefits for the spouse. The premiums they pay for this protection are equal to the difference between the benefit payable under the SL annuity and the joint benefit payable under the J&S annuity. For example, if the pension would pay $3,000 a month under the SL annuity option, but only $2,550 under the normal joint and 50 percent survivor annuity option, the couple is effectively paying a $450 monthly premium to insure that the spouse will be paid $1,275 per month (50 percent of the $2,550 joint benefit) in the event the plan participant dies first.

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