A pension is a contract between an employer and employee that guarantees a regular monthly or annual return on the former’s salary or expected future earnings. The pension plan is usually set up by an employer, with contributions made by the employer and annuities paid to employees as a portion of their final retirement pay. There are two types of pensions in US: employer-paid and employee-paid. Employee-only pension plans are basically a benefit taken directly from an employer. For the former, a retirement income can be realized through vesting; and for the latter, the annuity is given to the employee at the time of retirement.

An annuity provides a steady stream of income during retirement. However, if the insured party dies before the maturity date of the plan, all or a part of his or her death benefit will be forfeited to the beneficiaries. The two types of annuities are traditional and universal. In traditional, the death benefit is equal to the premiums paid, while in universal, the death benefit is equal to the face value of the accumulated balance plus the interest earned.

Universal Life Insurance is a type of annuity where premiums are paid to the insurer on behalf of the account holder. Premiums are paid monthly with a guaranteed minimum amount. At the retirement age, the insured pays a lump sum amount which becomes the death benefit of the account holder. If the account holder dies before maturity, no withdrawal penalty is applied. Social Security retirement benefits are based on the age of the account holder and not on the age at which the retiree begins receiving benefits. Social Security death benefits are also based on the age at which the account holder died.

Income tax risk for financial professional use only-not for distribution. In general, income tax will be imposed on the amount of the annuity, while retirement risks tax will be imposed on the periodical distributions. Annuity income tax will be deferred until distribution begin or until death, but the annuity will be taxed upon withdrawal. Retired persons may choose to continue to pay taxes on the withdrawals throughout their lifetime as long as the annuity continues to meet the required minimum requirements.

Universal Life Insurance policy allows for easy distribution of premiums to the beneficiaries in many situations. Premiums are payable monthly with guaranteed minimum amounts. After the death benefit, there are guaranteed returns, with the exception of extreme outlays. The guaranteed minimum amount is adjusted annually to account for inflation. Social Security death benefit remains constant at all ages.

Income tax risk for financial professional use only-not for distribution. This policy provides the most conservative coverage possible without providing guarantees of any type. The premiums and guaranteed returns remain level for the life of the policy. The annuitant receives a lump sum at death to cover expenses. Unlike Social Security, Federal income tax will not be imposed on the death benefit, but if the policy holder has made enough qualified distributions that his/her interest is more than enough to cover the remaining balance on the plan, the excess will be distributed to other policy holders.

Universal Life insurance retirement policy is another option available for financial professionals to manage estate settlements. This option is also designed for distribution risk. The premiums and guaranteed returns remain level for the life of the policy. However, withdrawals may be taxed depending on the current level of tax. This option should be considered if the retiree does not expect a large amount of distributions over the lifetime of the policy.

Cash Value Life Insurance is another option for retirement risks. This type of policy offers the option to invest some or all of the cash value, allowing the policy owner to build a portfolio that grows tax-deferred. If the invested funds produce a higher return than the policy’s death benefit, then part of the policy’s death benefit will be returned to the owner in exchange for investments. Some of these types of policies allow the use of additional cash value life insurance to offset higher risk transactions.