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(also called Pension Maximizer, Back to Back Term 100 and Annuity,
or Back to Back Insurance and Annuity)
What is Pension Maximization?
Penion Maximization is a 'sales concept' created by the insurance
industry. Typically intended to sell products through analogies
or finding needs for life insurance, in this case the sales
concept is something you should be aware of, it can save you
a lot of money.
Who might use Pension Maximization?
If you are looking at purchasing an immediate annuity, you should
investigate Pension Maximization
with your insurance agent. If you are using an annuity to fund
your retirement or create an income, Pension Maximization may
allow you to increase your income. You must however set this
up with your life insurance broker before you purchase the annuity.
How Pension Maximization works:
Lets say you are a married couple looking at retirement. You're going to annuitize your investments in order to create a retirement income. You might typically purchase a joint last to die annuity, an annuity that will provide some sort of regular income until both are deceased. In other
words, you set up an income stream that will last for as long as you both live.
The insurance company of course prices your income based upon how long they think both of you will live. The longer they expect both of you to live, the lower the income they will offer.
Pension Maximizer switches this around. Instead of purchasing a joint last to die annuity, you purchase an annuity on the life of the older person. As they are only providing income for the life of one person, and the older one at that, the amount of income the insurer will provide
will be higher than with a joint second to die annuity. You will also get a higher income because you won't purchase a term guarantee with this annuity. If you die tomorrow, the insurance company will provide no further payments, even though you've just given them a substantial lump
sum of money.
You now have a higher income stream, but you've incurred a high level of risk. This is where the Pension Maximization concept comes into play.
With your additional income, you then purchase an insurance policy on the life of the older person. Rather than the insurance company providing the guarantee of ongoing income for the survivor, you are going to cover this need yourself through the insurance purchase.
Now the survivor will technically have lost the income stream from the annuity, but they now have the proceeds from a life insurance policy, probably in the amount of the original investment from the first annuity. At this point they can use these proceeds to purchase a new annuity.
And since the survivor is now older, they can get a higher income with the same capital.
Why does it work?
What you are doing is taking advantage of the fact that a single life annuity with no term guarantee will provide a higher income than a joint last to die annuity and that that difference will more than cover the cost of an insurance policy. The result is that your income is now higher
even after the purchase of the life insurance.
The reason this works is fairly technical and involves the way actuaries price life insurance and annuites using mortality assumptions. The end result however is that this difference in prices may allow you to end up with a higher income from your annuity.
This concept does not work in all cases. There are additional tax consequences and benefits (the life insurance proceeds for example, are tax free, and can beneficially impact the purchase of the second annuity) that you will need to discuss with your life insurance agent.
The good news is that when it does work, it works well! You may be able to receive a higher retirement income just by suggesting this concept to your life insurance broker.
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