By Harper Willis 

— Two pension payout options each have a drawback

— Life insurance improves options

— Guaranteed universal life has scant risk of lapsing

The client, 68, was mere months away from retirement but couldn’t figure out which of two pension payout options to choose. When Kevin Kautzmann, president of fee-based EBNY Financial in New York City, took a look, he quickly saw why.

“One option would force him to put his own financial security over his wife’s, while the other would cause him to miss out on more than half a million dollars over his 20-year life expectancy,” says Kautzmann.  Option A paid out a whopping $7,000 a month, totaling $84,000 a year. But if the client died, his wife wouldn’t receive any payments. Option B paid out only $3,600 a month (just $43,200 annually), but was guaranteed as long as either of the spouses was alive.

Then his client offhandedly mentioned a separate topic: life insurance. A relatively healthy non-smoker, he was still easily insurable.

So Kautzmann suggested that he choose the $7,000 a month option on his pension and take out a life insurance policy naming his wife as the beneficiary. If he died and his pension payments stopped, the insurance payment would help support her.

Kautzmann, who had previously worked in the insurance industry, pointed the client to guaranteed universal life. Unlike variable life insurance, it would have almost no risk of lapsing. He also insisted on insurers with an A or higher rating.

To keep costs at a reasonable amount, the client opted for a $500,000 policy with a $300 monthly premium. If the husband dies, that payout would need to earn just 3% to 4% annually to effectively supplement the wife’s other sources of retirement income (including Social Security, income from investments and another $200,000 in pre-existing life insurance on the husband). And if the wife died first, the client could simply cancel the policy.

Kautzmann’s client has since retired and is pleased with the decision to stick with the higher pension payout. “He visits his family across the country whenever he likes, and he recently bought a vintage 1960s muscle car that he’s always wanted,” Kautzmann says.

–Practice Management is a column that looks at ways financial advisers can build and improve their business. Harper Willis can be reached at 212-416-2245