FRS Pension Plan members are provided with different retirement income payout options to meet their plans for retirement. The retirement income amounts under the different payout options are based assumed life expectancies. What if your life expectancies are different from the assumptions? How does this affect your decisions? Single members have limited survivor and beneficiary options. Married members are unwilling to elect “life only” income option #1 and leave the survivor without income, but what if the non-member spouse dies first? FRS members who are married can consider pension income strategies to maximize retirement income through the use of life insurance. Consider the following pension income strategy:
Implementation of Pension Income Strategy
In some instances, FRS pension plan members can maximize the lifetime income for married couples through a single life income payout option coupled with the purchase of a life insurance policy to insure the FRS member’s life with the survivor spouse as the beneficiary. This “pension maximization” strategy must meet certain criteria for the decision to be suitable. First, the premium paid for the life insurance policy must be the after-tax difference between the pension incomes paid for a single life (option #1) and 100% survivor (option #3) income options. Second, the difference in after-tax monthly must used to purchase a “No-Lapse Guaranteed Life Insurance Policy” payable for life. Finally, the amount of coverage should be sufficient to replace the taxable benefit with a tax free lump sum. The insurer must be financially sound and insured must be healthy enough to meet insurance company underwriting standards.
Two Retirement Scenario Outcomes
First scenario, FRS pension plan member survives their spouse, and/or life mate. This will result in higher lifetime income for FRS member than had a survivorship option (option 3) been chosen. The FRS participant would own a life insurance policy with cash value to surrender, maintain, or perhaps reduce the face amount to provide a family benefit.
Second scenario, FRS pension plan member is first-to-die. Survivor spouse or life mate replaces FRS pension income benefit with life insurance proceeds that are tax free. The total taxes paid over the survivor’s lifetime could be less due to the receipt of the tax free lump sum. Survivor can designate a beneficiary for any unused balance at their death which would not be available had a 100% survivor (option #3) income option been elected.
Pension income strategies can result in significant benefits to families who rely upon FRS Pension Plan retirement benefits for their financial well being. True North Financial Advisors provides financial planning and investment management services to FRS Pension Plan participants located in Boca Raton and throughout Palm Beach County. To better understand your retirement plan investment options, contact us.
This is a hypothetical example for illustrative purposes only.
