Bernie Buck of New York City embraced pension max 11 years ago, when he left the city-owned TV station WNYC-TV. Today Bernie, 70, and his wife, Joyce, 66, are struggling to understand and restructure some indispensable insurance that costs more than the agent said they’d ever have to pay.
These are just two of unknown thousands of pension-max victims whose plans have blown up, or are going to. For this scheme to pay, it usually has to be started well before you retire. Last-minute purchases generally won’t work, reports a brochure put out by Prudential Insurance Co. of America. At that point, the policy you can afford may be too small to support your spouse if you die too soon. Nevertheless, many agents target near retirees with sales presentations that run the gamut from bogus to well meaning but wrong. And where are the so-called industry watchdogs? The National Association of Insurance Commissioners hasn’t even formed a task force on the issue.
Pension max draws its superficial appeal from the two ways a married person can take a pension:
(1) As a single-life payout, for your lifetime only. This yields the maximum monthly income but leaves little or nothing for a surviving spouse.
(2) As a joint-and-survivor payout, stretching over the lifetimes of you and your spouse. Your monthly income is typically 10 to 30 percent lower. After you die, your spouse’s income may go down by another 20 to 50 percent.
For spouses who will depend on that money, the joint pension is the proper choice. But an agent may try to change your mind. He’ll advise you to take the higher, single-life payout and use the extra income to buy a life-insurance policy. If you die first, your pension ends. But the policy replaces it, giving your spouse the same level of income. If your spouse dies first, you drop the insurance and keep your higher income for life.
What’s wrong with that picture? It may not develop the way the insurance agent claimed. John Voigt’s plan low-balled the amount of coverage needed-hence lowering the cost. “That’s why it looked better than the pension,” he says. He could have left his widow $1,160 a month plus annual cost-of-living increases. Instead, he bought a $100,000 universal-life policy, which, it turns out, would have paid his widow a fixed $746 a month-something the agent didn’t say.
Nor did anyone tell Voigt that his coverage could end when he reached 80 unless he put up substantially more money. Michael Gibson, the agent who wrote Voigt’s policy, conceded in a 1990 letter to his superior that “the information given to Mr. Voigt was not correct at the time.” Today Gibson sells insurance in Wexford, Pa. He says he worked the Voigt case with someone else, took the insurance amount from MetLife’s pension-max sheets and didn’t do the illustration. Another MetLife agent discovered the errors and the company returned Voigt’s money. He now carries a $170,000 MetLife policy-enough to buy his wife an annuity of $960 to $1,030 a month, but with no annual raises.
Joyce and Bernie Buck’s search for advice started with a $100 visit to consultant Robert Ziskind, a pension-max supporter who did seminars with New York Life agent Vince Immordino. “I had the reputation and he paid me to do my dog-and-pony act,” Ziskind says. When the Bucks saw Immordino, he trashed the joint pension (they have his sales pitch on tape) and advised a $200,000 whole-life insurance policy. He said it would cost them only five annual $8,931 premiums-forever. Further premiums would be paid with loans against the policy’s cash value.
What has happened since? Interest rates fell, so the cash value didn’t grow by enough to cover all the premiums. Tax laws changed, raising the cost of the policy loans. Buck has to pay more or his policy will lapse. Immordino says the Bucks knew that dividends weren’t guaranteed. Says Bernie Buck: “Had I known that this policy could be in jeopardy for any reason, I would not have taken pension max.” So far, it has cost him more than he gained by taking the higher pension payout, not to mention the loss of peace of mind. Another New York Life agent is helping him restructure. The good news: he can cut his coverage to $100,000 and still leave Joyce with an adequate substitute for the pension she lost.
Consultant Ziskind’s analysis, by the way, contains a flaw common to many pension-max presentations. it shows you buying the insurance with the pretax dollars you gain from the higher pension payout. But you’d really buy with post-tax dollars-so you’d get a smaller policy and less spousal protection. Says Ziskind, “That has never come up. I’ll think about it.”
If you’re approached for pension max, ask the agent to:
Show that the cost of the policy won’t exceed the extra income you get by taking the single-life pension, after tax.
Prove that the policy will fund as much income for your spouse as the pension would have paid-regardless of when you die. I’ve never seen an agent do this. The plan won’t work if it protects your spouse at 80 but not when she’s 55.
Put all risks in writing, so you can prove what you were told. For example, if annuity rates fall the policy will buy your spouse less income than you had counted on. if policy costs rise, you might have to cut back on the amount of coverage you carry.
To help you discover whether a pension-max plan might work, I asked financial planner John Allen of Arvada, Colo., to develop a worksheet. I’ll send it to you free; write to Pension Max, NEWSWEEK, 444 Madison Avenue, New York, N.Y. 10022, and enclose a stamped, self-addressed, business-size envelope. If you think you’ve been taken, complain to your state insurance commissioner. That might help get the states off their duff.
