Many companies sponsor qualified plans such as 401k plans, profits sharing plans and pensions for the benefit of their workers. Federal law mandates that these plans provide a choice of benefits that includes a lifetime income option for the spouse of the employee. While this is a worthy social goal, it is not always a good economic choice, because it hides a rather pricey, life insurance policy.

For example, at retirement, Jake Goodworker, has accumulated an account balance of $257,563 in the profit sharing plan provided by his employer, ABC Manufacturing and Distribution, Inc. The company benefits officer meets with Jakes and explains that he has a choice of recieving a monthly benefit of $1,648 for as long as he lives or a benefit of $1,502 during his lifetime, with a reduced benefit of $751 to his wife Helen for her lifetime.

If Jake selects the higher income option, the plan will provide no income to Helen after Jake' s death. Because he fears for Helen's financial well being if he should happen to die first, Jake selects the lower of the two benefits. Jake has, unknowingly, just purchased a life insurance policy on his life and the premium is the $146 dollar a month (the difference in the benefits $1,648-$1,502). At retirement Jake has an acturial life expectancy of 18.2 year. The totoal projected cost of this hidden life insurance policy is therefore $31,886 ($146 per month times 18.2 years)

Like all of us, Jake does not know when he is going to die. He must therefore consider the worst case. As a female, Helen has a life expectancy that is longer than Jakes, so her benefit is slightly more expensive. However, the longer Jake lives, the older Helen gets and the smaller the nest egg required to provide her a lifetime benefit of $751. The table below shows the required lump sum to provide Helen's benefit at various starting ages.

Jake has in effect paid $146 a month for decreasing term insurance. There were a number of other options that Jake could have explored before making this decision. A knowledgable insurance agent is your best guide in making some of these choices (see Maxing Your Retirement Income)

The hidden life insurance that Jake, in effect, purchased through the profit sharing plan, has no residual value. The premiums, in the form of forgone benefits, are payable for life and can not be changed. However, if Jake had done a little pre-retirement planning and purchased a cash value life insurance policy a few years before retirement, he could have protected Helen at a much lower cost. He would have been free to elect the higher benefit amount, and still have protection for Helen, plus additional policy cash reserves to supplement other retirement or legacy needs.

If you are nearing retirement, talk to us about your retirement income options and the pre-retirement steps you need to take in order to maximize your employer supplied benefits.

*Our hypothetical comparisons and examples are intended solely to illustrate financial possibilities in one specific circumstance. They do not represent any particular investment or savings account; nor are they intended to recommend any specific course of action. Successful financial planning can be very complex and requires the assistance of an experienced professional.