How Life Insurance and Divorce Can Impact Retirement Planning – Part 1

{3:18 minutes to read} Life Insurance and how it relates to retirement plans is not something most couples give much thought to. The following articles, which I collaborated on with Steven H. Kobrin, a life insurance specialist, provide some insight and things to consider.

Life insurance can play a pivotal role in retirement planning. Here’s how: Let’s suppose you are planning for your retirement in a few years. You get the discussion going with both your financial advisor and employee benefit administrator. You learn that you will have two options when choosing the amount and duration of your distribution:

Option 1: Maximum monthly benefit.

With this option, you will be able to get the most cash out of the pension on a monthly basis. That could go a long way towards covering monthly expenses. The kicker, however, is that this distribution will last only during your lifetime. When you pass away, the monthly payments end, which, if you have a spouse or partner, could adversely affect their quality of life.

Option 2: Distribution over two lifetimes.

Here, the distribution will last over your lifetime, as well as that of your spouse or partner. When you pass away, they will continue to receive the distribution. However, as is always the case, there is no such thing as a free lunch. With this distribution schedule, the monthly amount will be lower than what would be available under Option 1.

Each option supports a different priority, so the decision poses something of a dilemma. Yet, with the clever use of life insurance, you can have your cake and eat it, too.

Select Option 1, the maximum monthly benefit. Then take out an insurance policy on your life. Your household will get as much money as is available on a monthly basis, and when you pass away and the distribution stops, your spouse or partner will receive the life insurance benefit. Both you and your spouse or partner can maintain your quality of life for both your lifetimes.

It goes without saying that a number of important factors have to fall into place in order for this use of “life insurance for pension maximization” to provide maximum value. These include:

• Other potential sources of income;
• Your tax bracket;
• Your insurability; and
• The cost of the life insurance policy.

But under the right circumstances, this strategy can make your retirement plan a winner.

Any good plan needs a contingency; a way to cover the what-ifs that might—and often do— pop up. One such event would be a divorce. How might a divorce impact retirement planning, especially if a life insurance policy is being utilized?

To answer this question, I sought the expertise of Ada Hasloecher, founder of the Divorce and Family Mediation Center, LLC. In part 2, she explains how planning is affected when a divorce precedes retirement.

The Firm of Steven H. Kobrin, LUTCF
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