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Watch out for the "Pension Max" life insurance trap! If you're in a corporate retirement plan and you're married, you may be tempted to employ the popular "pension max" strategy when you retire. Reason: It significantly boosts your plan payout, from a cash-flow standpoint. Be careful! Pension max may sometimes be the best way to go. However, usually it's not. Under the pension max approach, you take two steps:

STEP #1: Elect monthly pension payout that lasts only for your lifetime. The monthly payments under this single-life option can be substantially greater than those under the "joint-and-survivor" alternative. Example: You're entitled to $25,000 a year from your retirement plan if you take the single-life option. When you choose a "joint-and-survivor" annuity, one company might offer you $20,000 per year for both lifetimes. Depending on the company and the age difference between you and your spouse, he or she might receive 100% of the reduced benefit ($20,000), 75% ($15,000), or 50% ($10,000) if you die first. The greater the age difference, the bigger the difference between the two payout options. Unfortunately, if you take the joint annuity and your spouse dies first, you'll be stuck with the lower monthly income for the rest of your life. CAUTION: If you specify the single-life alternative, your spouse typically must sign a waiver of benefit.

STEP #2: Buy life insurance on your life, with your spouse as beneficiary. This is to provide for him or her in case you die first. Then your spouse receives tax-free insurance income to replace the lost pension payments. The policy proceeds could be paid out as an annuity. If he or she dies first, you can cash in the policy and pocket the proceeds. Plus, you keep collecting the full single-life payments. Suppose you plan to retire at age 60. You're now 55. You can choose $25,000 a year for the rest of your life, or $18,000 ($7000 less) until both you and your spouse die. If you elect the single benefit, you might be told that you should buy a $175,000 life policy. A cash-value policy that would be paid up in 10 years could cost $6,000 a year in premium. This gives you an extra $1000 each year until the policy is paid up. From then on, you'd receive an extra $7000 annually.

WHY IT'S NOT SO SIMPLE: Unfortunately, numbers can lie when they don't tell the whole story. Examples:

(1) When you use pension max, you take an additional financial risk. You must be insured when you die to collect life insurance proceeds. If you do not make the premium payments or otherwise keep the policy up to date, you can lose coverage and your spouse can be left with nothing. Premium payments may not "vanish" in 10 years after all. Your annual premium is based on an insurance-company projection of interest-rate trends and other factors. The insurer might project 8% annual growth, for instance. But this policy "illustration" is NOT a guarantee. If rates fall, the value of the policy may fall short of projections (many have!), and your policy may not be fully paid up after all. In such cases, people must either pay higher premiums, accept less insurance, or drop the policy.

(2) Life insurance annuity payouts do not include cost-of-living increases. Many company retirement plans, by contrast, provide retirees with periodic payout increases. Usually they apply to both participants and survivors.

(3) Tax consequences aren't taken into account in pension max comparisons. If you elect the single-benefit option, you generally must pay tax on the extra pension payments. However, you must then buy life insurance with after-tax dollars.

(4) Retirees at some companies remain eligible for health-insurance coverage as long as pension payments continue. However, if you choose a single-life annuity and you die first, your surviving spouse no longer qualifies for health benefits. In that case, you must factor in how much it will cost your spouse to replace the lost health-care coverage (a whopper!).

(5) Never trade in your spouse's pension protection for pension max unless you've considered all the ramifications (including defending yourself in divorce litigation!). Use this simple approach: How much do I pay in after-tax premiums? How much do I stand to gain, in pre-tax and after-tax dollars, over how many years?

WHEN PENSION MAX MAY PAY OFF FOR YOU: Even so, pension max may be a valid strategy in some situations. One is if you're in good health and your spouse isn't, reducing the likelihood that you would need joint-and-survivor payouts. So too if your company plan does not take into account the ages of retirees and their spouses (honestly, some do not!). You could be sacrificing too much with the joint-and-survivor option if your spouse is much older than you are. You'd be paying for coverage with very little expectation of getting a survivor benefit. Those under 62 are probably being overcharged. It may also make sense to go it alone under the pension plan if you're a woman. Women have a longer life expectancy than do men, and they can buy their own life insurance for less.