At retirement, many of us are given a choice as to the type of distribution that we would like to receive on a monthly basis from our pension plan.

The choices are usually as follows:

Single life option – this distributes the highest amount possible for the life of the recipient but distributions terminate at his or her death.

Joint and full survivor option – the full amount that is distributed to the recipient is continued during the lifetime of his or her surviving spouse.

Joint and reduced survivor option – this makes a monthly distribution to the recipient and subsequently a reduced percentage, usually 50%, for the lifetime of a surviving spouse.

By selecting one of the options that includes survivor benefits, one generally gives up a significant amount of monthly income!

In planning for their retirement, many people have decided to purchase an amount of life insurance with all or some of the additional cash flow generated by taking the single life option.

This allows the retiree to receive the maximum distributable benefits. If the recipient dies first, the spouse receives the death benefit, which can be used to continue monthly income through one of the many settlement options available, or put the proceeds in an account and take distributions as needed.

This works well if planned properly in order to give the surviving spouse an income at least equal to what he or she would have received under the pension plans distribution choices.

If the spouse dies first, the higher distributions from the pension would of course continue for the recipients lifetime, and the life insurance policy can be cashed in or the beneficiary can be changed.

Depending on how the ownership of the life insurance policy is set up, the face amount can be kept out of any estate tax calculation.

It is worth noting that the way the insurance is set up is critical to the pension maximization concept working. One must be careful to set up the policy from an extremely conservative perspective so that the policy doesn’t “Disappear” before the need for it does!