A few years ago I met a man we’ll call Claude. About two years previously Claude had retired form a mining company near Bathurst, New Brunswick, Canada.
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A colleague and am were attempting to arrange a seminar for retirees at his firm. We discovered that his company a new policy to not allow outside economic planners to come in and they experienced done their own in house retirement seminars through their human resources department.
Claude had attended one of those seminars prior to he retired. He felt that he had been given all the information needed. After all that they had an investment expert from the banking field, they had their own pension people presently there and they also had social workers in order to warn them of the mental and emotional adjustments that come with retiring. Claude felt they had done the very best retirement planning possible. So he experienced well prepared when he met with all the human resources people at retirement.
Claude’s wife came with him to meet with the human resources people who laid out the choices in his pension plan. There have been several choices regarding their retirement income.
The first choice was they Claude could receive $3, 000 a month but that would leave his wife with no income at all after Claude died.
The second choice was about $2, 500 a month which would leave her with about $1, 250 per month after Claude’s demise.
The third choice gave them $2, 000 a month now and should Claude die she would continue to receive the full $2, 1000 a month for the rest of her life.
NOTICE: These figures are not exact, and figures do vary according to the age range at retirement and also may vary among pension plans.
Then it All Proceeded to go Wrong
Claude shared with me that will his wife had died of a brain aneurysm eleven months right after he had retired.
That was a difficult time for him, naturally they had produced many plans and they both were healthy people capable of travelling before a few of hours before her death. What a shock that was to him.
When he began the business associated with paperwork required when someone dies, he went back to his industry¡¯s human resources people to get his full pension reinstated now that he no more needed the survivor benefit with regard to his spouse. But it doesn’t work this way. He has to continue to receive the $2, 000 a month for the rest of his lifestyle.
What Claude did was he bought life insurance inside his pension plan.
But it wasn’t real life insurance so he got stuck with having to pay premiums for life even though he does not need the insurance any more.
The rates were not described as premiums but here is how I calculated what I call payments. The difference between the $3, 000 option and the $2, 000 choice is $1, 000 a month. Claude reduced their pension income by $1, 000 a month so his wife would be looked after when he died. In other words he bought a death benefit though his pension plan for $1, 000 a month.
He didn’t die, she did. Now every month for the rest of their life he knows he is carrying out without that $1, 000 intended for his entire life. If only he had bought actual life insurance from a life insurance agent he could have cancelled the policy when it was no longer needed. He could have enjoyed the full pension without having to pay any premiums in his situation.
The additional irony is that as a healthful man he could probably have bought a similar benefit for less than $1, 000 per month.
Comment: It has been my experience that when people prepare for their retirement with the insurance professional they will save money. Even just a couple years before retirement and healthful non-smoker could purchase life insurance policy and save about three times the high quality by owning his own policy. The cash he would be saving is the increased pension income he and his spouse could enjoy if his wife was looked after by the life insurance earnings. Even a smoker can usually double their money. Even if they were to break even with the pension option it really is still a better deal than choosing the benefit through the pension plan.
Got Claude had a break even we would are already much better off in the long run.
How much money might Claude have saved? It is very probable to be retired for 25 years or more these days. So $1, 000 a month for 25 years would be amount to $300, 000. That’s a lot of money. Make sure you have a life insurance specialist on your financial planning team they can save you money.
Gordon Hughes, Enhanced Lifestyle Planner plus Certified Financial Planner
Gordon offers over 30 years experience in banking and financial services industry. He gives his awareness of behind the scenes practices that work to the advantage of banks, investment homes, and big business in general yet seldom benefit consumers.