It is with tempered joy that our team greets the news of a measured relaxing of stay-at-home and social distancing rules.
Malls are opening again for limited business, allowing the purchase of essential clothing and housewares and a measure of therapeutic readjustment to consumers trapped too long indoors. We hope for a rapid dispelling of the coronavirus plague and a quick return to normal.
Hope is a funny thing – you’ll never accomplish anything without it, professional or personal, but it needs to be tempered – there’s that word again. When the global economy is unfettered, we expect it to come roaring back to life – but it won’t be all prize tomatoes, as the old timers used to say. The viral crisis will assuredly leave economic damage in its wake that could take years, perhaps decades to repair.
In researching this article, I tried to determine the cost to the US government and its taxpayers of the COVID-19 pandemic. It’s the same with everything we’ve seen throughout the crisis: estimates vary, even wildly, and sometimes seem darkly tainted by political slant. In any case, it seems sure that federal expenditures to fight the virus and its fallout have reached at least $3 trillion, and may well double before the dust settles. Whatever the direct costs, consider this: in 2020, the federal budget deficit may reach 17% of GDP. Last year, it was 4.8%.
Around the globe and across the board, governments will have to make cuts. In the US, we wonder if Social Security, a hugely expensive program that is forever the target of reformers – yet so sacrosanct that it never gets touched – may finally be trimmed. Moderate proposals to limit benefits to the wealthy are often heard in Congress. This approach might not save much in percentage terms, but a lot of dollars would be involved, and it could mark a good start. Social Security may seem untouchable, be we counsel this: times change, and seemingly immoveable objects can shift suddenly.
This writer recalls the first time he heard about Social Security’s woes, in the early 1970s, a time of societal and economic malaise. The first spokesman I heard was my father, who was there at the program’s inception in 1935. He said SS was never intended to provide a full retirement income: you were still expected to take care of yourself, he warned. The problem was the decline of company pension plans. My father started work as a lathe operator in 1934 and over the years, climbed his way up to supervisor with 650 employees under his management. When he spoke, his company was shutting its doors after more than a century of operations. He saw the trend, firsthand, before most experts and analysts; he could hardly miss it.
We hope that everyone has learned the lesson by now: Social Security will likely survive in more or lest robust form, but you’d better not depend on it to survive, let along thrive in retirement. When advising clients on Social Security matters, we never slip into panic mode – prudent analysis and early preparation are more our things. For those concerned about the government’s solvency and the pension system’s short-term health, though, we have some useful suggestions.
Anyone who is retired or nearing retirement age, particularly the relatively affluent who don’t need Social Security to support their living expenses, we recommend two strategies that redeploy their monthly SS income to cover the premium for life insurance – but not just any type of policy.
In the first strategy, the customer uses their monthly SS check to purchase a whole or universal life policy for their children. As the premiums are paid, the policy’s cash value swells – more on this shortly. If ever in need, the children could borrow or withdraw from this sum. This is a sound way to provide a safety net to the kids, which also carries a death benefit. Youngsters may not want to hear the latter part, but when you explain the pain-free gain it will provide one day to their heirs, they’ll probably change their tune.
Our second scheme calls for older clients to simply buy a whole or universal policy for themselves. This can be expensive as we age, but for those in their 50s, the premiums shouldn’t be too bad, while for those a decade or so more senior, it can often be done at a reasonable cost, as long as their health is good. The policy’s cash value offers the same ‘emergency fund’ benefit, while the payout at death can form a legacy for children or other heirs.
Universal life insurance offers features that make it a wonderful tool to support the needs of older clients. When you pay the premium on a universal policy, a portion goes to cover the death benefit and another to pay the company’s expenses. The third and final amount forms the policy’s cash value. The latter tends to grow rapidly in the early years, as a greater portion of the premium is apportioned to it. As the insured party ages and the actuarial risk increases, more of the premium is devoted to covering the death benefit, and a smaller proportion is deposited in the cash value account.
The cash value goes immediately to work for the client in universal life policies, current money market rates determine the interest on cash value. Some clients don’t like this variability, so they prefer whole life insurance, which pays a predetermined interest rate over the policy’s life. The premium and death benefit are similarly fixed, while in the case of universal life policies, these amounts can be adjusted to suit the client’s financial situation.
Policies that accrue a cash value offer great potential value. The policy owner can make partial withdrawals or borrow against the cash value at a preferred interest rate. In both cases, if the sums are not returned or repaid, the death benefit will be reduced by a matching amount. Finally, the entire cash value can be withdrawn, thereby closing the life insurance policy. There’s usually a penalty for doing so in the policy’s first years, but once that contractual hurdle is cleared, the policy can be surrendered without disadvantage.