General Life Insurance Topics
How Life Insurance Helps When Money Is Needed the Most
Robert William Daniel, Jr., recognized as the inventor of the modern cable television industry, raised himself from poverty to one of the great philanthropists of our day. He is credited with the saying, “There is no luggage rack on a coffin,” and he lived by that creed. His greatest delight was aggressively seeking out underprivileged young people and providing them with scholarships so they could attain college degrees and become productive citizens in the society they lived in. One year his foundation awarded over 400 scholarships worth $500,000,000. He personally mentored many of those students, helping to make sure those funds had not been awarded frivolously or carelessly. He also founded a bank specifically with young borrowers in mind, with the bank being run by young business people making all the decisions on who could obtain a loan. He understood a consistent cash flow was priceless, but he also recognized there were times when a major fusion of money was essential for the success of a business endeavor.
Life is no different. Most financial events can be met with the normal cash flow of a family income, while there are other events where an infusion of capital keeps the family afloat. A well planned monthly budget expanded to include assets for the unforeseen can go a long way to alleviating the stress level such events bring. Some identify this budget category as the emergency fund. It should demand more of our attention than we give it.
While an individual is producing an income, unforeseen events or emergencies don’t attract much attention; but when that income stops, these emergencies lurking in the shadows along with daily expenses share in their considerations. Take for example the food, clothing, sheltering, transportation, medical, and educational expenses, etc. categories just seem to take care of themselves as the income offsets the liabilities created by those needs. What happens when the source of income disappears? Something has to step in and take its place, so it is important to keep in mind it is earned income that keeps a family in a comfortable standard of living. The question which has to be answered in any logical and objective look at the possibility of lost income is how far down you as the income producer are willing to let your family’s standard of living sink. Visualize on a graph a right triangle where the leg on the bottom represents years of life; the leg going up the right side represents levels of standard of living of poverty, public welfare, middle income, comfortable living, and wealth; and the third leg (hypotenuse) represents income with a circle on it labeled “personal income” positioned at the comfortable living demarcation. Imagine how much time and energy you need to personally expend right now to maintain that position on the graph, and consider whose time and energy it will take when you are gone. At what point on that line would you feel comfortable leaving your family?
What are some of the financial events you need to include in your financial planning? It is obvious the above mentioned food, clothing, shelter type expenditures need to be met first. These are items you can plan for by just reviewing your monthly budget and multiplying that amount by the number of months your spouse would have to pay, with an inflation guard built in so the earning power doesn’t diminish due to the passing of time.
An event which happens twice in your financial future is your final expenses and the final expenses for your surviving spouse. According to the National Funeral Directors Association, the median cost of a funeral increased 6.7% over the last six years to $7,640, while cremation reflects an 8.4% over the last 5 years to $5150. These are what is referred to as non-declinable expenses associated with funerals, where some other expenses inflate the expenses to nearly $20,000.The website https://www.nfda.org/news/media-center/nfda-news-release/id/4797 gives a wonderfully detailed listing of expenses associated with funerals by regions of the United States.
Expense of Raising a Child
It is reported by the Department of Agriculture in 2017, incorporating inflation, at least $284,500 required to raise a child from birth to age 17. This figure is considerably higher when the child is being raised in a wealthy family.
The cost does come down where more than one child is being raised in a household due to parents being able to buy larger economy size food products, hand-me-downs, built-in babysitting and transportation expenses being spread out over a number of children. (https://smartasset.com/retirement/the-average-cost-of-raising-a-child).
The above figure for raising a child does not include expenses for educating your children beyond secondary schooling. The College Board (Ibid) reports the expense for an in-state public four year institution stands at $20,700 yearly or $82,000 for four years while the expense for a private non-profit four year college stands at $46,950 yearly or a total of $187,800. With those staggering figures community colleges and trade schools make great alternatives and provide options for a wealth strapped family.
Family Financial Needs
Let’s assume for the following discussion we are dealing with a husband, Rick, age 36, and wife Mary, age 34, with four children ages 5, 7, 9, 14. Mary has been trained as a school teacher but has chosen to stay at home since the second child’s birth to be a full time mom. Rick is a computer consultant making $150,000 a year with an employer provided term life insurance policy worth two times his annual salary and a (401)k worth $98,000. Rick also carried a whole life policy worth $250,000 on himself and $80,000 term rider on Mary. They had $25,000 in their savings account.They also carried $20,000 debt on credit cards, $45,000 on a newly acquired Lexus, and $650,000 mortgage on their home. They had just paid off their student loans and had set aside in a family vacation fund the monthly amount they had been paying on those loans to take their children on a cruise to celebrate that event at spring break.
As fate would have it, one wintry evening several hours after Rick should have been home the doorbell rang. A highway patrolman holding his hat in his hand braced himself against the storm as he informed Mary there had been an accident. Rick had hit an unseen patch of ice causing him to lose control of the vehicle, throwing him into a bridge piling, killing him instantly.
“I am so sorry,” he quietly spoke, placing his hat back on his head as he disappeared into the snowstorm.
Tragic as this story is, there are approximately 32,000 such visits every year across America. In this age group of 35-39 alone there were ten other wives who became widows on the same day as Mary. What about the children? How many are impacted every day when one considers the 32,000 adult deaths compounded by nearly 2 million more injured. It must be a staggering number. (https://www.autoinsurance.org/age-groups-fatal-crashes/ and https://www.cdc.gov/vitalsigns/motor-vehicle-safety/index.htm).
After a sleepless night, Mary began the process of marshalling her assets by visiting her bank and getting her father’s name added to the accounts so someone else can be authorized to sign on her behalf, visiting the mortuary so the death certificate can be ordered and funeral arrangements prepared, notifying the life insurance agent of Rick’s death so a death claim may proceed, reporting to her vehicle insurance agent the accident so the vehicle can be replaced, scheduling a visit with the human resources officer of Rick’s company to get details on unpaid salary, adjustments on health insurance, submitting a claim against the group term life insurance, obtaining information on the status of 401(k) plan, scheduling an appointment with the Social Security Administration to review survivor benefits, and reviewing Rick’s last will and testament as to how he wanted the estate to be administered. One final responsibility Mary will have to attend to within nine months to a year is the filing of the appropriate tax forms for the deceased. These forms may or may not be required depending upon income, size of estate and income of the estate. They are composed of Form 1040–federal income tax return; Form 1041–federal fiduciary income tax return for the estate; Form 709–federal gift tax return, and Form 706–federal estate tax return. The filing of the appropriate forms is one part of settling estate where having professional assistance would be helpful and greatly appreciated. (https://law.freeadvice.com/Tax_law/income_tax_law/
Social Security Computations
Upon visiting with the Social Security people, Mary discovered as a widow she is not eligible for any benefits from Social Security other than a $255 funeral sum until age 60 or becomes disabled. Any claim she has on her husband’s benefits now comes through the four children since each child under age 18 (19 if still in elementary or secondary school) is eligible to receive up to 75% of the primary insurance amount of the deceased father with a family cap of between 150-180% of the PIA. Since there are four children and the father’s PIA would be approximately $2,888, each child’s proportionate percentage would be reduced until the total would be $4,332. Each child would receive his or her share through age 18 and then no more. This age limitation can be affected by disability or other exceptions determined by the SSA.
This means Mary will benefit from children’s shares until she is age 48, adjusted each time a child passes age 18.This would mean she will have a “black out period” from age 48 to age 60, and then if she chooses to participate at a reduced rate she can begin again.
At her retirement Mary can choose between what she would have received as a widow or if her income makes it greater she can choose her own benefit.
Present Financial Needs
Turning her attention to present financial needs, Mary decides she would like to not work away from home until all her children are in school. The loss of her husband and the children’s father is going to be traumatic enough without throwing into the mix Mary having to leave every morning to work just as her four young children are leaving their secure zone as well.
Her car is being replaced, funeral expenses will be paid by the automobile insurance company, and she will have one more month of Rick’s salary in which time she can get the children’s social security funds flowing and receive the death benefit from Rick’s personally paid for life insurance. Not certain just how long she may want to stay in their present house, and with the interest rate on the loan being 3.5%, she decides to continue making house payments. Using the interest only settlement option on the life insurance proceeds from work for now leaves her options open for using those funds at a later date. She also decided, since she has a great deal of faith and confidence in their life insurance agent, to have him transfer the 401(k) funds to a qualified conservative mutual fund which Mary hopes to let grow in anticipation of needing the funds during her “black out period” for social security.
Mary knows her major expense is the house payment; but with social security benefits for children, interest from savings, interest only settlement option from group term insurance, and using the certain amount settlement option from Rick’s personal life insurance, she can buy the time she needs to get her certification for teaching accomplished and her children in school before she makes any further long term financial decisions.
Future Financial Arrangements
With the present and near future financial needs being met with financial resources available right now, Mary can with the umbrella of the life insurance policies waiting in the wings for any emergency move forward in her life’s journey.
With appropriate time for mourning the loss of her loved one, she can plan for her own fulfillment by getting her teaching certificate, making arrangements to become socially active in the event she may want to remarry, knowing she doesn’t have to marry the first meal ticket down the road, enjoying the time she can spend watching her children grow up, seeing the fruits of Rick and her financial planning early in their married life.
When Rick left his parents and took to himself a blushing bride, he started his own triangle of life. The life expectancy leg stretched far into the future bounded only by an unseen power which holds sway over life’s duration.The leg representing the standard of living he would provide was yet to be determined. He started the position of the standard of living by the ball representing his income just below the comfortable living level. He reasoned it was just time which stood between him and his dream of moving the ball up to being financially secure.
Fortunately, Rick and Mary, both realizing their vulnerability to life and how an untimely death could send the ball holding up the standard of living crashing down, made the decision to purchase life insurance which would insure their financial success. By the amount they chose to purchase they immediately created an estate which no one or anything could take away from them.
So while Mr. Daniels’ comment of no luggage rack on a coffin is instructive, it is not completely accurate. One does not take to the grave the acquired things of life, but he does take to the grave all the potential earning power and yet unacquired acquisitions of his estate. How far along the leg of life expectancy you are determines how much you actually take because somewhere along that leg your ability to produce diminishes.The miracle of life insurance creates and represents the potential future earnings and then sustains them when individuals can no longer generate them. Life insurance is what allows dreams and aspirations which could not be fulfilled in the time allotted to be fulfilled. Mary will be teary eyed as she stands on the deck of the cruise ship missing Rick, but her heart will be gladden as her children excitedly exclaim they are going back for the third helping of ice cream at the self-help fountain on the Disney Dream Cruise Ship.What was it that just blew gently across her cheek? I wonder. . . .
The above article uses several graphs and illustrations which are in no way intended to accurately portray actual payouts. They are intended to show the process by which decisions are reached. Any names or circumstances used are not intended to reflect any specific person. The conclusions drawn in this article are strictly those of the author, Glen B. Marks, CLU, a retired insurance agent of 42 years of insurance sales and management.