Which is better, lump sum or pension (Fidelity)

Lump sum or monthly pension?

What you need to know about monthly and lump sum pension offers.

• FIDELITY VIEWPOINTS 
• – 12/19/2014

 

Faced with mounting pension costs and greater volatility, companies are increasingly offering their current and former employees a critical choice: Take a lump sum now or hold on to their pension.

“Companies are offering these buyouts as a way to shrink the size of their pension plans, which ultimately reduces the impact of that pension plan on the company’s financials,” says John Beck, senior vice president for benefits consulting at Fidelity Investments. “From an employee’s perspective, the decision comes down to a trade-off between an income stream and a pile of money that’s made available to him or her today.”

Pension buyouts can be offered to any current or former employee of a firm. You may be already receiving benefits as a retiree with an accrued (vested) benefit, or you may have a vested benefit from a former employer, or your current company may be offering you a pension lump sum buyout long before you retire.

Whatever the case, here’s how a pension lump sum offer typically works: Your employer issues a notice that by a certain date, eligible employees must decide whether to exchange a monthly benefit payment in the future for a one-time lump sum. If you opt for the lump sum, you’ll receive a check from the company’s pension fund for that amount, and the company’s pension (or defined benefit) obligation to you will end. Alternatively, if you opt to keep your monthly benefits, nothing will change, except the option to take a lump sum will be removed.

Some employers are also considering buying annuities for those who do not opt for the lump sum offer. In this case, your benefits will not change, except that the insurance company’s name will be on the checks you receive in retirement, and the guaranteed income will be provided by the insurance company.1 (As with offering lump sums, companies that switch to an annuity provided by an insurance company can remove the pension liability from their books.)

The process is relatively simple, but the decision about which option to take can be complex. Here are the pros and cons of each option:

Keeping the monthly payment

Pension plans typically provide a payment of a set amount every month from your retirement date through the rest of your life. You may also choose to receive lifetime payments that continue to your spouse after you die.

These monthly payments do have drawbacks, however:

• If you’re not working for the company making the offer, your benefit amount typically will not increase between now and your retirement date. During retirement, your life annuity payments typically do not come with inflation protection, so your monthly benefits are likely to lose purchasing power over time. An annual inflation rate of 3%, the average since 1926, will cut the value of your benefit in half in 24 years.
• Taking your pension benefit as a life annuity means you may not have access to enough money to fund a large, unexpected expense.
• Your ability to collect your payments depends in part on your company’s ability to make them. If your company retains the pension and can’t make the payments, a federal agency called the Pension Benefit Guaranty Corporation (PBGC) will pay a portion of them up to a legally defined limit. The maximum benefit guaranteed by the PBGC in 2014 is $4,943 per month for most people retiring at age 65. The monthly guarantee is lower for retirees before age 65 and larger for retirees age 65 or older. If responsibility for your payments shifts to an insurance company, it will be the insurance company and not the pension plan that is responsible for your guarantees.2

Taking the lump sum

A lump sum may seem attractive: You give up the right to receive future monthly benefit payments in exchange for a large cash payment now—typically, the actuarial net present value of your age-65 benefit, discounted to today. Taking the money up front gives you flexibility: You can invest it yourself, and if you have assets remaining at your death, you can leave them to your heirs.

However, keep in mind the following cautionary factors:

• You are responsible for making the funds last throughout your retirement.
• Your investments may be subject to market fluctuation, which could increase or reduce the value of your assets and the income you can generate from them.
• If you don’t roll the proceeds directly into an IRA or an employer qualified plan like a 401(k) or an 403(b), the distribution will be taxed as ordinary income and may push you into a higher tax bracket. If you take the distribution before age 59½, you may also owe a 10% early withdrawal tax penalty.
• You can use some or all of the lump sum to purchase annuity—typically, an immediate
  annuity—which could provide a monthly income stream as well as inflation protection or other features. But as an individual buyer, you may not be able to negotiate as good a deal with the insurance provider as the benefit you would have received by taking the pension plan annuity, so the annuity may or may not replicate the monthly pension payment you would have received from your employer. You also need to select your annuity provider carefully, paying special attention to a company's credit ratings, and make sure you read and understand the terms and conditions of the annuity.

Making your choice

Whether it’s best to take a lump sum or keep your pension depends on your personal circumstances. You’ll need to assess a number of factors, including those mentioned above and the following:

• Your retirement income and essential expenses. Guaranteed income, like Social Security, a pension, and fixed annuities, simply means something you can count on every month or year and that doesn’t vary with market and investment returns. If your guaranteed retirement income (including your income from the pension plan) and your essential expenses, such as food, housing, and health insurance, are roughly equivalent, the best choice may be to keep the monthly payments, because they play a critical role in meeting your essential retirement income needs. If your guaranteed income exceeds your essential expenses, you might consider taking the lump sum: You can use a portion of it to cover your monthly expenses, and invest the rest for growth.
  
  These comparisons may be relatively easy if you’re already retired, but developing an accurate picture of your retirement income and expenses can be difficult if you’re still working. Beware of the temptation to use the lump sum to pay down credit card debt or handle other current expenses—and not just because of the large tax bill you’re likely to face. “Lump sum distributions come from a pool of money that is developed specifically for retirement,” explains Beck. “To access those funds for another reason puts the quality of your retirement at risk.”
• Longevity. Both your monthly benefits payment and the lump sum amount were calculated using actuarial calculations that take into account your current age, mortality tables, and interest rates set forth by the IRS. But these estimates don’t take into account your personal health history or the longevity of your parents, grandparents, or siblings. If you expect to have an above-average life span, you may want the predictability of regular payments. Having a payment stream that is guaranteed to last throughout your lifetime can be comforting. However, if you expect to have a shorter-than-average life span because of personal reasons or your family medical history, the lump sum could be more beneficial.
• Wealth transfer plans. After you’ve considered retirement income and expenses, and have planned an adequate cushion for inflation, longevity, and investment risk, it’s appropriate to take wealth transfer plans into consideration. With pension plans, you often don’t have the ability to transfer the benefit to children or grandchildren. If wealth transfer is an important factor, a lump sum may be a better option.

Moving forward

A pension buyout should be evaluated within the context of your overal retirement picture. If you are presented with this option, consult an expert who can give you unbiased advice about your choices. Finally, be aware that more corporations continue to consider discharging their pension obligations, so it’s a good idea to stay in touch with old employers. “If you’ve left a pension behind at a former employer, sometime in the coming years you’re very likely to be offered a lump sum,” says Beck. “Keep your former employer’s administrator up to date on your current address, because you can miss this opportunity if your employer can’t find you.”

Next steps

• First and foremost, make sure you know whether you have any pension benefit at your current or former employers, and keep your contact information with those companies up to date. You cannot even consider an offer if you don’t know it exists.
• Second, make sure you have a plan for retirement. If you understand your needs, you will be better prepared to understand which option is right for you if you do receive a lump sum offer. Because these offers usually have a limited window for election, it will be more difficult to make an educated and informed decision without knowing, in advance, your total retirement financial picture. Using Fidelity Income Strategy Evaluator® (login required) and Retirement Income Planner can get you started.
• If you decide to take a lump sum in lieu of monthly pension payments, you may want to consider rolling it over to an IRA. A direct rollover from your employer's plan to your IRA provider (trustee to trustee) will not be subject to immediate taxation and may be the best way to preserve the tax-deferred status of this money. You should consult your tax adviser.

If you do receive an offer, review it with a trusted financial adviser. Everyone’s circumstances are different. What is right for your friend, neighbor, coworker, or relative may not be right for you.

How to Create a Paycheck in Retirement (moneywatch)

By

Steve Vernon /

MoneyWatch/ October 22, 2012, 6:45 AM

3 ways to turn your IRA and 401(k) into a lifetime retirement paycheck

     

(MoneyWatch) I recently offered an overall financial strategy to help you avoid going broke in your retirement years: Don't spend your retirement savings!
Instead, you should think of your savings as "retirement income generators," or RIGs, that deliver a monthly paycheck that lasts for the rest of your life. The goal then becomes to spend no more than the amount of your monthly paycheck.
There are essentially only three ways to generate a monthly paycheck from your retirement savings:

• Invest your savings and spend just the investment earnings, which typically consist of interest and dividends. Don't touch the principal.
• Invest your savings, and draw down the principal cautiously so you don't outlive your assets. (In this post and future posts, I'll call this method "systematic withdrawals.")
• Buy an "immediate annuity" from an insurance company and live off the monthly benefit the insurance company pays you.

These methods are all designed to generate a lifetime retirement income, no matter how long you live. Achieving this goal will help you relax and enjoy your retirement. These methods might also provide protection against inflation, another important goal for many people.

Although these represent the three basic approaches to ensuring steady retirement income, each method has many variations. Here are just a few examples:

• If you decide to invest your money and only spend your investment earnings, you can invest in a variety of mutual funds, bank accounts, individual stocks and bonds, real estate investment trusts, or rental real estate.
• If you decide to use the systematic withdrawal method, you can invest your savings on your own and decide how much to draw down, or you can use a managed payout fund that does the investing and withdrawing for you.
• If you decide to purchase an immediate annuity, you have options. For example, you can buy an annuity that's fixed in dollar amounts, one that's adjusted for inflation, or a variable annuity that's adjusted according to an underlying portfolio of stocks and bonds. You can also buy an annuity that starts at a later age, or you can purchase a hybrid annuity that includes some of the features of systematic withdrawals.

These RIGS each have their advantages and disadvantages; there's not one magic bullet that works best for everybody. Most important, each type of RIG generates a different amount of retirement income:

• RIG #1, interest and dividends, typically pays an annual income ranging from 2 percent to 3.5 percent of your savings, depending on the specific investments you select and the allocation between stocks, bonds, cash and real estate investments.
• RIG #2, systematic withdrawals, typically pays an annual income from 3.5 percent to 5 percent of your savings, depending on your investments and how worried you are about exhausting your savings before you die.
• RIG #3, immediate annuities, can range from 4 percent to 6.5 percent of your savings, depending on the type of annuity you buy and your age, sex and whether you continue income to a beneficiary after your death.

You don't need to use just one type of RIG to generate the income you need. In fact, it might be best to use a combination of a few different types. In addition, there can be good reasons to change your RIGs as you get older. And some financial institutions have been introducing hybrid products and solutions that combine features of two or more of these basic RIGs.
 

© 2012 CBS Interactive Inc.. All Rights Reserved.

The Best Annuities (Barrons)

MAY 28, 2012 Top 50 Annuities
By KAREN HUBE | MORE ARTICLES BY AUTHOR

Americans are eager to lock in steady retirement income. We pick the best annuities from a dizzying array of choices.

Top 50 Annuities
By KAREN HUBE | MORE ARTICLES BY AUTHOR



When wealth manager Peter D'Arruda talks about the "old days" for annuities, he isn't talking about the Roman Empire, where these income-generating insurance products were invented and payments were calculated with an abacus. He's talking about last year, when guaranteed payouts and benefits on all kinds of annuities were far more generous. For example, he helped a 45-year-old investor find a fixed index annuity with guaranteed annual appreciation of 8.2% for 30 years and no risk to principal.

Today an investor that age likely wouldn't even qualify for an index annuity with income guarantees. "And that rate? It doesn't exist anymore," says D'Arruda, president of Capital Financial in Cary, N.C. "A lot has changed. There are still some good products out there, but it's hard to find the whipped cream on the sundae."


Annuities, which are insurance contracts, come in many shapes and sizes. They include fixed-rate, in which the principal compounds at a pre-set rate; variable, in which the principal appreciates based on the performance of an underlying mix of stocks and bonds; deferred, which require an upfront investment with payouts down the road, and immediate, which turn a lump sum, upon purchase, into guaranteed monthly payments for life. One attractive feature of annuities is that, as with most individual retirement accounts, or IRAs, balances grow tax-deferred until withdrawals begin. Even more important these days, annuities help remove investors' worst fears: losing principal and running out of money in retirement.

Variable annuities also resemble an IRA because withdrawals can begin after you turn 59½. But there the similarity ends. Given a dizzying number of features and restrictions, contracts for some annuities -- variable and otherwise -- can run 300 pages or more. And because each comes with its own small twists, these products can be very difficult to compare.

LOW BOND YIELDS and a sagging stock market have forced big insurers to re-evaluate their annuities strategies in recent years, and some major providers, including Hartford Financial (ticker: HIG), John Hancock, ING (ING), Genworth Financial (GNW) and Sun Life Financial (SLF), have opted to exit the business or scale back. Most of the remaining companies have cut back benefits significantly on new contracts.

"We've seen investment options in variable annuities diminished, guarantees brought down substantially and fees going up," says Nigel Dally, an analyst at Morgan Stanley. "Protracted low interest rates and high volatility in the stock market have made it far more expensive for annuity companies to support their products."

For investors, however, all is not lost. There are still competitive products that provide significant assurances for a reasonable price. Barron's has combed through hundreds of annuities to come up with a list of 50 best-in-class investments.

The tables below list highly competitive contracts in five annuity categories: deferred variable, fixed index, fixed deferred, immediate, and longevity insurance, which is geared toward 55-to 65-year old investors who won't begin collecting until they turn 80 or 85.






."Longevity insurance removes the big challenge in retirement planning: knowing when you're going to die," says Adam Rolewicz, director of Opus Advisory Group in Purchase, N.Y. "Knowing you'll have an income at a later age makes it easier to plan how to invest the rest of your money."

WHILE LOW INTEREST RATES have impacted all types of annuities, the category that has been hit the hardest is also the biggest: variable annuities. Of the $231.1 billion investors poured into annuities last year, 67% went into variable annuities, according to the Insured Retirement Institute.

Since the stock market crash of 2008, insurance companies have tried to one-up each other with increasingly generous living-benefit riders, guaranteeing a withdrawal rate for life, even if you live to 100 and the assets in your account are depleted. Demand for such products has been strong: Almost nine out of 10 variable annuities sold in 2011 had such a rider.

But many providers apparently promised more than they could afford. "Insurers try to cover the risk of offering generous lifetime guarantees by buying Treasuries and long-term swaps, but this doesn't work well when interest rates are so low," says Tamiko Toland, managing director at Strategic Insights, a market-research firm.

To compensate, annual withdrawal guarantees have been reduced -- to around 4.5% for a 65-year-old from 6% a year ago. And the annual costs for these add-ons have gone up about 25%, to more than 1% of assets.

Another way many insurance companies, including MetLife (MET), RiverSource and AXA Equitable, are trying to bring down the cost of operating variable annuities is by restricting investment options. Lincoln National (LNC), one of the country's highest-rated insurers, added five asset allocation models to its regular line-up of mutual fund investment options in its American Legacy and ChoicePlus variable annuities, and investors are given incentives to select them. For example, those who choose an asset allocation model may get a 5% lifetime withdrawal rate at age 60 instead of 4% for investors who choose to invest among the mutual funds. "This reduces the cost of hedging…and allows us to offer a sustainable product," says Brian Kroll, Lincoln's head of annuity solutions.

Investors slowly may be catching on to these changes. While variable-annuity sales rose 12% last year, to $155.5 billion -- the highest level since the 2007 peak of $183 billion -- they slumped 7% in the first quarter of 2012.

If there is a positive spin for investors from the recent shake-out in the variable- annuity market, it's that some of the stronger companies, including Jackson National, Ohio National, Guardian, AXA Equitable, Nationwide and Pacific Life, are likely to keep coming out with competitive and unique products to set themselves apart from their peers, says Scott DeMonte, co-owner of VA Edge, an annuity-oriented consulting firm.


DESPITE VARIABLE ANNUITIES' overwhelming popularity, some advisors say most variable annuities should be avoided because they are too expensive. The average variable annuity charges a 1.34% fee for insurance and administrative expenses on top of fees for the underlying investment, which average almost 1%. All in, that's an average of almost 2.3%, compared with 1.2% for the average mutual fund, according to Morningstar.

Most annuities also have surrender charges, or fees for withdrawing your money. Fees typically begin at 7% or 8% in the first two years after purchase, and decline each year thereafter before expiring after seven to nine years.

Fixed index annuities, a variation on fixed annuities, have been gaining attention lately. Most of the portfolio grows at a fixed rate, but a variable component is pegged to an index, typically the S&P 500.

While fixed annuities usually beat the rate you would get on a certificate of deposit or a money-market account, their rates have been only between 1.5% and 2.5% these days. Investors have been choosing fixed index annuities as a better-paying alternative. Sales of indexed annuities rose 14% in the first quarter of this year, the only annuity category whose numbers grew.



With these hybrids, your money is invested in investment-grade bonds and Treasuries. The insurer uses the interest generated by these investments to buy options on an index. If those options pay off, investors get the appreciation of the index–although participation typically is capped at around 6%, meaning that if the stock market goes up 10% or 20%, you earn 6%. In exchange, if the market declines, you are guaranteed to have no negative return. The account value usually is reset periodically to reflect and guarantee appreciation.

A fresh and popular wrinkle in these indexed annuities is a so-called income rider, which guarantees investors a minimum annual payment for life at various ages. If you begin withdrawals at 65, for example, your payment will be lower than if you begin at 66 (see the accompanying tables).

In these and other fixed annuities, the pricing is built into the payout rates, so the only sound way to size them up is by comparing what you ultimately pocket if you go with one contract over another.

THE MOST BARE-BONES KIND OF ANNUITY is an immediate annuity, and it is the type most favored by financial advisors to address investors' concerns about outliving their money. Quite simply, you give an insurance company a lump sum, and based on formulas that crunch life-expectancy data, interest rates, insurance fees, and other factors, the insurer guarantees you a certain income, usually for life.

For example, a healthy 65-year-old woman who buys an immediate annuity with $300,000 can expect to get a monthly income stream, starting right away, of about $1,600, or $19,200 annually, no matter how long she lives. By age 88, her life expectancy, she will have been paid out $441,600.

If you die before your principal is paid out, the insurance company keeps your assets. But there are a number of variations on this simple annuity to appeal to investor concerns. For example, you can arrange the annuity to cover the lives of both spouses, adjust for inflation, or be guaranteed to pay for a certain period even if you die within that period.

The costs of guarantees are reflected in the payout. The table "Best in Class" shows how payments can vary.

The variation that's best for you comes down to your income needs and how long you think you will live. For example, an inflation rider could make sense for an investor with expectations of a very long life. But the embedded costs of the inflation rider will result in lower initial payments. "It can take 12 to 15 years before the payment grows to what the initial amount would be without the inflation rider," says Debi Dieterich, senior annuity analyst at AnnuityAdvantage.com. If you have a long life, eventually your total payout will be greater with the inflation rider, but in the first decade or more "you lose the use of that money," Dieterich says.

Even with all the guarantees, some investors aren't willing to live within the strictures of annuities. Indeed, there's a chance they will do better: While a $200,000 investment in a group of high-quality blue-chip stocks paying 2.5% will provide income of only $5,000 in the first year, the payout may grow faster than inflation over time as companies lift their dividends. And if you look at the investment as a deferred annuity and reinvest all of the dividends for 10 or 15 years, the yield on your original investment will be significantly higher, and the principal likely will be, too.

But you take the risk of a bear market, which can be especially painful if it occurs early in your retirement. And experts say it is hard to beat the so-called mortality benefit you get from pooling your assets with other annuity investors. Quite simply, people who live long get subsidized by those who don't.

ONE OF THE MORE INTERESTING NEW PRODUCTS in the annuity industry is a form of a deferred income annuity called longevity insurance. This is geared toward folks in their 50s and 60s who are grappling with one of the most variable factors in retirement planning: how long you will live.

Longevity insurance provides a income starting late in life, say, at age 80 or 85. "The reason it's so attractive is that you have such leverage when go out that far -- 50% of the population dies between 65 and 85 -- [as] you get the money from people who died, and compounding based on a very long bond rate," says Matt Grove, vice president in charge of the annuity business at New York Life.

When used properly, annuities can remove concerns about longevity, and lower overall investment risk. This can make investors more comfortable allocating assets to riskier investments, ultimately increasing overall returns.

.E-mail: editors@barrons.com

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Why You Should Wait: Fixed Annuity Rates are Still Too Low (Morningstar)

The Error-Proof Portfolio:

For Annuities, Timing Is Key

By Christine Benz | 04-12-10

Many investors' hackles go up when you say the word "annuity." They immediately think of variable annuities, many of which are pricey and often sold, not bought. (When the TV program Dateline is using hidden cameras to catch salespeople in the act of peddling inappropriate products to unwitting seniors, it's fair to say that an industry has an image problem.)


But plain-vanilla single-premium immediate annuities deserve more respect. The concept is as simple as it can be: You give the insurance company a slice of your retirement portfolio, and the insurer, in turn, sends you back a stream of income for the rest of your life. You can layer on additional bells and whistles--such as survivor benefits in case you die early in the life of the contract--but they will dramatically decrease the payout you'll receive.


The Value Proposition
The idea of using annuities as a slice of retiree portfolios has been gaining traction in the financial-planning community and among mainstream investors during the last few years. Against the backdrop of a rocky stock market and a shrinking number of defined-benefit plans, annuities' promise of a certain payout holds a lot of appeal. And with bond yields still exceptionally low right now, annuities are also attractive in that they generally deliver a higher payout than what a retiree would receive via a traditional high-quality fixed-income investment.


Annuities also help address the more basic problem that--regardless of the market environment--we're all planning for an unknowable time horizon. None of us knows how long we'll live. And increasing life spans increase the risk that a portfolio of stocks and bonds (that is, one without an annuity) might not last throughout a retiree's lifetime, thereby burnishing annuities' appeal.


Problematic Timing
For all of these reasons, it's become conventional wisdom that SPIAs should be part of retirees' toolkits. Unfortunately, fixed annuities are catching on at what could, in hindsight, be the worst possible time. That's because the payout you receive from an annuity is based on two key factors: 1) the expected life spans of other annuityholders and the likelihood that some of them will die before actuarial tables would suggest; and 2) the interest rate that the insurance company can expect to earn on your money.


The first factor--in essence, the fact that some unlucky people in the annuity pool will die before their time--is why annuities can provide a higher payout than fixed-rate investments. In a pool of hundreds of people, the statisticians know that at least some of the folks who should live into their 80s and 90s will expire in their 60s and 70s instead. Those early decedents will have paid more into the annuity than they've gotten out. Other annuitants, meanwhile, will live well beyond what the actuarial tables would suggest, enabling them to receive more than they've put into their retirement.


The wrinkle is that people are living longer, and insurance companies are having to spread the money in the annuity pool over more and more very long lives, so increasing longevity will have the side effect of shrinking the payouts for everyone. (As a side note, an interesting body of research indicates that annuity pools include significant adverse selection--that is, the people who are most likely to buy an annuity are also likely to live much longer than actuarial tables would suggest. That may be because those most attracted to annuities may have longevity in their families, or perhaps there's a correlation with wealth and better health care.)


That trend will provide a long-term headwind for annuities, but it shouldn't have a significant impact on the timing of when you buy an annuity. The other component of annuity payouts--the interest rate the insurance company can expect to earn on your money--is more problematic. If you buy an annuity today, the currently ultra-low interest-rate environment will depress the payout you receive. (It's not a perfect analogy, but it's somewhat akin to buying a long-term bond with a very low coupon. Rates may go up in the future, but you'll be stuck with your low payout.) The average fixed annuity rate plunged from 5.55% to 3.94% between December 2008 and December 2009, according to National Underwriter.

What to Do?
For those who like the concept of an annuity but are concerned about the effect of low interest rates on payouts, one possibility is to ladder your investments, essentially dollar-cost averaging in to mitigate the risk of buying an annuity when interest rates are at a secular low. If, for example, you were planning to put $100,000 into an annuity overall, you could invest $20,000 into five annuities during the next five years. Such a program, while not particularly simple or streamlined, would also have a beneficial side effect in that it would give you the opportunity to diversify your investments across different insurance companies, thereby offsetting the risk that an insurance company would have difficulty meeting its obligations.


Alternatively, a prospective annuity purchaser could simply wait until fixed-income interest rates head back up toward historical norms. While fixed-income yields have recently begun to climb, they're still extremely low relative to historic norms.

Smart Ways to Get Cash from your Life Insurance (from Kiplingers)

A New Lease on Life Insurance
That term or cash-value policy you bought to protect your young family could cushion your retirement as well.

By Kimberly Lankford

From Kiplinger's Personal Finance magazine, September 2009

You're 53 or 56 or 61, the kids are out of the house,the mortgage is nearly paid off, and before long you'll be eligible to retire and take your pension -- and so will your better half. Life insurance? At 60, you can expect to live another 20 to 25 years, if you're in good health.

You'll have more than enough money, or at least your house will be worth a million. So surely you won't need to pay insurance premiums for much longer, right? Dropping your policy would be like getting a bonus worth hundreds or thousands of dollars a year.



Nice try. After the real estate collapse and the stock-market crash, the finances of preretirees are far more challenging. Your mortgage payments may now be more of a burden, you can't borrow against home equity, and your retirement accounts have shrunk so much that you hope to hang on to your job and continue to contribute until you're old enough to collect your full Social Security benefit. That's crucial because your pension isn't getting any bigger -- and it may in fact shrink if your company can't keep the plan solvent or the investments perform poorly.

Here's the unpleasant dilemma if you have a term-life-insurance policy that is about to expire: Renew the coverage and your premiums are almost certain to soar. Drop all coverage and your family could be in a financial bind if you die prematurely.

If you own permanent, or cash-value, life insurance, you have other decisions to make. Premiums may be level but high. You may be tempted to take out money to compensate for a smaller pension or a tighter budget, especially if you are forced into early retirement. Or you might cash it in altogether to be done with premiums. That could make sense----or it could be a major financial-planning error.

Term-life policies
Millions of Americans bought low-cost, multiyear term policies ten to 20 years ago when their kids were young, and they expected to drop the coverage when the term -- and low rates -- expired. But if you go without now, you could be missing some special opportunities to extend your coverage for less than you think and retain tax-free death benefits that will make up for the damage to your retirement funds and pension.
Dane and Susan Swenson of Gainesville, Va., both 58, thought they'd be finished with life insurance by now. Dane retired from the Army in 1998 and currently works as a civilian for the U.S. Department of Defense. He has life insurance through work until he retires, which he plans to do in the next few years. He has a military pension and will qualify for a small federal-employee pension. But if he were to die and Susan collected only reduced survivorUs benefits, sheUd be short of money to live on.

The couple originally thought their retirement savings would allow Susan to go without life-insurance benefits. "I planned to be self-insured, but then the market dropped," says Dane. His retirement accounts fell by as much as 40%, so he started to reconsider the idea of going without insurance.

Early in 2009, Dane bought a $200,000, 15-year term policy from Genworth for $600 a year. "The policy covers the difference between being self-insured and the decrease in our portfolio," he says.

That may sound like a low price for a policy that will cover Dane until he turns 73, but it's hardly unusual. Term-insurance rates have plummeted over the past 15 years because of intense competition and longer life expectancies. So you may actually pay less now for the same coverage even though you're older, or lock in a longer rate guarantee with little impact on your premiums.
In 1994, a healthy 40-year-old man would have paid at least $995 per year for a 20-year, fixed-rate term policy with a $500,000 death benefit. Today, the same man -- now age 55 -- could buy ten more years of comparable coverage for $880 a year, as long as he's still physically fit. (In most cases you'll be asked to answer a few questions about your health, provide the insurer with doctors' references, and agree to a brief physical exam at home.)



If you have health issues, find an agent who deals with several insurance companies and can help you present a strong case for a fair deal. Also, check whether the expiring policy has conversion features. Most term-insurance policies come with the option to convert to a permanent life-insurance policy so that you can be covered for the rest of your life, regardless of what happens to your health. The premiums will be high: They are based on your age at conversion, which means the older you are when you convert, the more you pay. But the rates will also reflect your medical condition when you originally signed up for the insurance -- and unless you're a marathon runner, you were probably lighter and healthier then. And, in case you didnUt look, term insurance gets very expensive in old age.

Cash-value policies
Cash-value life-insurance policies, such as whole-life and universal life, don't expire. They can lapse if you don't keep up the premiums; but as long as there's enough money in the policy, the insurance will live on with you through age 100. Cash-value insurance is often criticized because it's hard to follow where all your premiums go and how your value builds. But as you get older, you may find that this complexity translates into more ways to pull money out and still preserve your life-insurance coverage.

Tom Arenberg of Mequon, Wis., bought a whole-life policy from Northwestern Mutual when he was just 22 years old. In addition to its value as protection, says Arenberg, now 57, he "considered it savings that would be harder to get at than if the money were in a bank."

A whole-life policy involves trading higher out-of-pocket costs for some guarantees. You pay a fixed annual premium that depends on your age, health and the size of the policy, and in return you know what your minimum cash value and death benefit are worth every year. If the insurance company invests well (usually in bonds and mortgage securities) and controls other expenses, youUll receive policy dividends, which can further build up your cash value and death benefits. There's no guarantee that you'll receive a dividend every year, but you're not in the position of a stockholder who knows the company may cut cash payments if it so desires. Policyholders virtually always get something. If yours is a mutual insurance company, you're legally considered an owner of the company and share in its gains.

There are two ways to extract cash from a permanent life policy: a withdrawal or a policy loan. Both moves reduce your death benefit, but you don't have to forfeit your coverage.
Arenberg borrowed from his policy's cash value a few times in the early years, for what he calls "growing-up stuff," such as buying his first home. He quickly repaid the loans so he could restore the full death benefit. He had the option to increase the size of the death benefit every three years by paying more premiums, and did.

But now that the Arenbergs' three daughters are 19, 21 and 24, and Tom has retired after 34 years at Accenture, the couple's needs for the policy are gradually shifting from family protection to helping Tom and his wife, Diane, with retirement. "It's become a safe, low-maintenance investment," Arenberg says. "I didn't care if it had the best return -- I wanted to be the least unhappy guy in the room if there were a downturn," he says. Like everyone else's investments, his have taken a hit. But, he says, "We're hurting a lot less than others."

He uses some cash from the life-insurance policy to pay for long-term-care-insurance premiums, and he may use more of it, eventually, to pay for his daughters' graduate-school expenses and to donate to charity. He likens the policy to a chess piece in a commanding position -- there's no rush to make any moves except to ensure that the policy stays in force so his heirs can collect a death benefit tax-free.

How you access your cash value while you're alive matters in terms of your coverage and your tax bill. If you simply cash in the policy, which is known as surrender, you take back the cash value all at once, minus any outstanding loans. But that means you give up the death benefit and owe income tax on the policy's gains over and above the premiums you've paid. If you bought the policy at, say, age 25 and you're now 60, that's an enormous tax hit. It would be smarter to withdraw up to the amount you've paid in premiums, your basis, which you may do without paying tax.

If you need occasional cash, the best way to claim it is a policy loan. You reduce your death benefit by the amount of the loan plus interest (which is generally low, perhaps 6%), but you never have to pay it back. If the policy is still in force when you die, your heirs get the remaining reduced death benefit tax-free. The downside of a policy loan is that you need to be very careful not to let your policy lapse, or else you'll owe taxes on the loan, even though you've spent the money and may think you borrowed the cash from your own savings. Although you can have the interest deducted from the remaining cash value, that's dangerous. It's wise to at least pay the annual interest as it accumulates.

Another option is to make a tax-free conversion into an income annuity (see Guaranteed Income for Life). You'll give up the death benefit and owe taxes on a portion of each annuity payout. But in exchange for paying taxes, you stop paying premiums and can be assured of a steady stream of income for life or for a specified number of years.

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