Taking Control of Your Pension Income: A Retirement Income Protection Review

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1 Taking Control of Your Pension Income: A Retirement Income Protection Review Did you know that, at retirement, you might have to make a difficult decision that could negatively impact your future financial security and that of your spouse? Prepared for: Our Clients Brought to you by: Peter von Halle, CLU, ChFC von Halle Brokerage Group 48 Notch Road Little Falls, NJ Office: (973) pvh@vonhalle.com Table of Contents Page Registered Representative offering securities through Cadaret, Grant & Co, Inc., Member FINRA/SIPC An Important Decision at Retirement 2 January 01, 2013 Joint and Survivor Annuity Payout Requirement 2 Pension Benefit Option Examples 3 Potential Retirement Income Protection Solution Using Life Insurance 4 Retirement Income Comparison 5 Types of Cash Value Life Insurance 6 Retirement Income Protection Action Checklist 7 Important Information 8

2 An Important Decision at Retirement You Might Have an Important Decision to Make at Retirement! Did you know that, at retirement, you might have to make a difficult decision that could negatively impact your future financial security and that of your spouse? At retirement, you will have to decide how your pension benefit will be paid out for the rest of your life: Should you elect to receive the maximum retirement check each month for as long as you live, with the condition that upon your death, your spouse gets nothing? OR Should you elect to receive a reduced retirement check each month, with the condition that upon your death, your spouse will continue to receive an income? Did You Know... The decision you make will determine the amount of pension income you receive for the rest of your life? This decision is generally irreversible? In making this decision, many people unknowingly purchase the largest death benefit they will ever buy and one over which they have no control? Joint and Survivor Annuity Payout Requirement What Is the Joint and Survivor Annuity Payout Requirement? If you are married, federal law requires that, in order to protect your spouse, you must elect a joint and survivor annuity payout option for your pension benefits. This guarantees that your surviving spouse will continue to receive at least one-half of your pension income. This concept is sound, except that you have to pay for a joint and survivor annuity payout option: Your pension benefit is reduced for as long as you live. If your spouse dies before you, your pension benefit cannot be restored to its unreduced amount. All pension payments cease when both you and your spouse die. Retirement Income Protection Review for Our Clients Page 2 of 8

3 Let s take a closer look at what this could mean to you. Pension Benefit Option Examples Let s look at the results of the three most common pension benefit options, using a hypothetical example: Life Income Option: If you receive your pension benefit under the life income option, you receive the maximum lifetime pension payment. If you die first however, your surviving spouse receives nothing after your death. For example: For as long as you live, you receive a monthly pension benefit of $2,000. If you die first, however, your spouse will receive a monthly pension benefit of $0. If your spouse dies first, your monthly pension benefit remains unchanged at $2,000. Joint and One-Half Survivor Option: If you elect the joint and one-half survivor option, you'll receive a lower lifetime pension payment. On the other hand, if you die first, your surviving spouse will continue to receive a lifetime pension benefit equal to 50% of your pension benefit prior to your death. For example: For as long as you live, you receive a monthly pension benefit of $1,700 or about 85% of the maximum life income option benefit. If you die first, your spouse will receive a lifetime monthly pension benefit equal to 50% of your benefit, or $850 per month. If your spouse dies first, however, your monthly pension benefit remains at $1,700. Joint and Equal Survivor Option: With the joint and equal survivor option, you'll receive a significantly lower lifetime pension payment. Your surviving spouse, however, will continue to receive 100% of your pension benefit if you die first. For example: For as long as you live, you receive a monthly pension benefit of $1,500 or about 75% of the maximum life income option benefit. If you die first, your spouse will receive a lifetime monthly pension benefit equal to 100% of your benefit, or $1,500 per month. If your spouse dies first, however, your monthly pension benefit remains at $1,500. There may, however, be an alternative to reducing your pension benefit by 15% to 25% in order to provide your spouse with a survivor benefit... Retirement Income Protection Review for Our Clients Page 3 of 8

4 A Potential Retirement Income Protection Solution Using Life Insurance Federal law alows a pension plan participant to waive the joint and survivor annuity payout requirement, with the written consent of his or her spouse. This means that, with your spouse s consent, you can elect to receive the MAXIMUM life income annuity payout at your retirement. What, however, happens to your surviving spouse s income and lifestyle if you should die first? With a retirement income protection solution, you purchase sufficient life insurance TODAY to replace the pension income lost at your death, assuring that your spouse will have an adequate source of income after your death. In making this important decision, you should evaluate the risks associated with retirement income protection funded with life insurance: Your income after retirement must be sufficient to ensure that the life insurance policy premiums can be paid and coverage stay in force for your lifetime. Otherwise, your spouse may be without sufficient income after your death. If your pension plan provides cost-of-living adjustments, will upward adjustments in the amount of life insurance be needed to replace lost cost-of-living adjustments after your death? Does your company pension plan continue health insurance benefits to a surviving spouse and, if so, will it do so if you elect the life income option? Retirement Income Protection Review for Our Clients Page 4 of 8

5 Retirement Income Comparison Joint and Survivor Annuity Payout Option OR Retirement Income Protection Funded with Life Insurance While you re both living... You receive a reduced pension benefit, the amount of which is guaranteed. You receive your full pension benefit. There is, however, a cost for the life insurance protection. If you die first... Your spouse is guaranteed to receive an amount equal to all or a percentage of your pension benefit. Assuming the life insurance policy has been kept in force by the payment of premiums, your spouse can use the income-tax-free death benefit to provide a lifetime income. If your spouse dies first... You are guaranteed to continue receiving a reduced pension benefit for as long as you live. You continue to receive your full pension and can continue to pay the life insurance premiums or use any cash value to provide additional retirement income. If you have a financial emergency... You cannot look to your pension as a source of additional emergency funds. You can borrow or withdraw any available cash value from the life insurance policy (withdrawals and loans will reduce the policy s death benefit and cash value available for use). Your children or other heirs... Receive nothing from your pension when both you and your spouse are deceased. Can be named as beneficiaries of the life insurance policy, if your spouse dies first and you keep the policy in force. A properly-designed retirement income protection plan using life insurance enables you to take your maximum pension benefit, retain control and flexibility and stil assure your spouse s financial security upon your death, assuming the policy is kept in force by the payment of premiums. Retirement Income Protection Review for Our Clients Page 5 of 8

6 Types of Cash Value Life Insurance There are four types of cash value life insurance from which you can select a policy that best satisfies your needs and objectives. The primary differences in the types of cash value life insurance fall into three categories: fixed or flexible premiums; responsibility for investment decisions; and benefit guarantees or benefits based on actual investment returns. Whole Life Insurance The policyowner pays a fixed, level premium and cash values accumulate at a guaranteed* rate of return. The insurance company promises to pay a guaranteed* death benefit. Policy dividends may be payable. Universal Life Insurance The policyowner can increase or decrease premium payments and select from a level or increasing death benefit. Cash value accumulations reflect current interest rates or are tied to a stock market index, such as the S&P 500 Index. Variable Life Insurance The policyowner pays a fixed, level premium and selects from a variety of investment options for cash value accumulations. There is generally a minimum guaranteed* death benefit and the potential for higher death benefits, depending on the performance of the investment options selected. There is no minimum guaranteed cash value. Instead, the cash value available depends on the performance of the investment options selected. Variable Universal Life Insurance The policyowner can increase or decrease premium payments and select from a variety of investment options for cash value accumulations. If a minimum premium payment schedule is maintained, there may be a minimum guaranteed* death benefit. Cash values are not guaranteed. Instead, the cash value available, as well as the potential for a higher death benefit, depend on the performance of the investment options selected. * Guarantees are subject to the claims-paying ability of the issuing insurance company. NOTE: Your licensed financial adviser will discuss with you how specific cash value life insurance products may work for you in your particular situation, including the product's features, benefits, risks, charges and expenses. Retirement Income Protection Review for Our Clients Page 6 of 8

7 Retirement Income Protection Action Checklist The Analysis Estimate the risks associated with retirement income protection, including: Estimate the risks associated with retirement income protection, including: Your retirement income must be sufficient to ensure that the life insurance policy premiums can be paid and coverage stay in force for your lifetime. If your pension plan provides cost-of-living adjustments (COLA), should upward adjustments in the amount of life insurance be considered? If your company s pension plan continues health insurance benefits to a surviving spouse, will it do so if you elect the life income annuity payout option? Calculate the amount of life insurance needed to continue the desired income to your surviving spouse. To Implement a Life Insurance Plan Determine the amount of additional life insurance you must purchase to fund the retirement income protection plan. Select the type of life insurance policy. Establish your insurability. Arrange for payment of premiums. You Can Manage Your Finances... It s by managing your finances that you write the story of your life. You are both the author and the story s principal character. Resolve to perform what you ought. -- Benjamin Franklin Retirement Income Protection Review for Our Clients Page 7 of 8

8 Important Information The information, general principles and conclusions presented in this report are subject to local, state and federal laws and regulations, court cases and any revisions of same. While every care has been taken in the preparation of this report, neither VSA, L.P. nor The National Underwriter Company is engaged in providing legal, accounting, financial or other professional services. This report should not be used as a substitute for the professional advice of an attorney, accountant, or other qualified professional. Life insurance contracts contain exclusions, limitations, reductions of benefits and terms for keeping them in force. All contract guarantees are based on the claims-paying ability of the issuing insurance company. Consult with your licensed financial representative on how specific life insurance contracts may work for you in your particular situation. Your licensed financial representative will also provide you with costs and complete details about specific life insurance contracts recommended to meet your specific needs and financial objectives. Before purchasing a variable life insurance policy, carefully consider the contract and the underlying funds' investment objectives, risks, charges and expenses. Both the contract prospectus and the underlying fund prospectuses contain information relating to investment objectives, risks, charges and expenses, as well as other important information. The prospectuses are available from your licensed financial representative or the insurance company. You should read them carefully before purchasing a variable life insurance policy. NOTE: This Retirement Income Protection Review is intended for use with participants in employer-sponsored qualified retirement plans. This review, however, is NOT an accurate reflection of civil service or military pension benefits. U.S. Treasury Circular 230 may require us to advise you that "any tax information provided in this document is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer. The tax information was written to support the promotion or marketing of the transaction(s) or matter(s) addressed and you should seek advice based on your particular circumstances from an independent tax advisor." VSA, LP All rights reserved (VSA 1a2-03 ed ) Retirement Income Protection Review for Our Clients Page 8 of 8