Just about everyone out there is only too well aware that we are in very difficult economic times which are going to become more difficult before they get better. Here we offer points, guidance, direction, and advice to the general public in an effort to enable individuals, families, and small businesses to retain coverages that they have presently in force and/or to obtain coverages that make the best sense under these current conditions. Since insurance is such a broad field, we limit the topics to life insurance, medical coverage, accident/sickness disability income protection, Medicare supplementary coverages, and retirement funds, both in deferral and distribution status. Retirement funds include both qualified and non-tax-qualified accounts. With unemployment levels anticipated to reach 10% during 2009, putting the country in deep recession(some would say depression), we will divide this commentary into three parts:
1. Those who are unemployed and/or businesses which have gone under or are about to.
2. Those other 90% or so who remain gainfully employed, whether as an employee, self-employed, or small business owner.
3. The retired and the disabled. For our purposes, we will limit the time frame to some kind of economic recovery or stabilization at two years, say, 2011. By then, things will probably look better. Let us hope that this is the case. So let us begin.
1. For those who have become unemployed, what can a financial advisor, insurance-oriented professional, or trusted consultant actually offer? Fair question. After all, without an income, especially after unemployment compensation runs out and savings dry up, what can we talk about? The obvious first step, it hardly needs to be said, is to make finding a job or starting a business into a process, that is, into a full-time job. And, yes, there is work to be found out there. It may take a while, maybe a long time. Still, unless one is quite rich, this is the first priority. That said, in the meantime, until the employment problem is solved, there are some things to be done:
A. For those with cash value life insurance and annuity policies, this is the first place to tap for living expenses, either by loan or cash withdrawal, depending upon type of plan. It’s private, easy to access, no qualifying, and the funds don’t have to be paid back–ever. Of course, when things do get better, it is best to begin repayment scheduling. Life policies also generally provide automatic premium loan features which keep them in force as well. Dividends, if available, can also be tapped. Annuities are more restricted but can still be accessed, tax-qualified or non-tax-qualified. This can certainly put food on the table, keep a roof over one’s head, get the car repaired or the payment made, the vehicle insurance in force, pay the doctor, and can prepay premiums on other insurance besides auto, such as home, medical, term life insurance, to name just a few.
B. Insurance-oriented financial professionals naturally develop strategies which will keep all or most coverages in force, as well as living expenses. This brings up the accessing of funds in retirement plans. Whether or not, depending upon age, one experiences the 10% income tax penalty, along with the added tax liability of qualified distributions, when someone needs money, that simply overides all else. Lots of people have company 401(k) plans, IRAs, SEPs, just to name a few. When pushed up against the financial wall and some of this is available, it will simply have to be utilized. Also, it does not much matter if the account balances are down. The need for cash comes first. For those at least 62 years of age, there is always Social Security retirement income. Be aware, one takes a pretty good sized reduction at these early ages. Still, money is money.
C. The next course of action, of course, is the use of credit cards. A well-known financial advisor recently recognized this situation and changed her position on getting all of one’s card balances paid off as rapidly as possible. The new recommendation, in light of the rather extraordinary deepening recession, would be to pay the monthly minimum to keep the cards in force. Using credit cards while unemployed is really a very bad idea in the long run; however, in the short run, they can keep things running. Any longer than our limited time frame would lead to rather unpleasant outcomes. One can actually, as the old joke goes, pay one’s Master Card with one’s Visa Card. Even though the Credit Card Companies are tightening things up, this still remains a viable avenue in the short run—–again, no loan qualifying.
D. Lastly, it may even come to moving in with family and/or friends for a while. And because of having little or no income, one can apply for Medicaid, certain county and state programs that provide income means-tested free or very low-cost medical care. In the Houston, TX, area, for example, that would be the Harris County Hospital, Medical Center, and its outlying clinics. Look for these in your own city, county, and state. If one is a Veteran, there are the VA Hospitals and Medical Facilities. There are the S-CHIP medical insurance programs for children and others that qualify. There are many more free or near-free services out there, many of which can be found via Internet searches. Call your Advisor for even more ideas to help get through this. In event things get really rough, see an attorney about taking refuge under the federal bankruptcy laws. From filing onward, debts can still be discharged or restructured and everything gets frozen from creditors for extended periods of time. Done correctly under the capable guidance of an attorney, this very legal procedure can be lifesaving.
2. The Employed. While it is certainly true that, as of this writing, that some 90% or so of Americans are working and earning, all are deeply concerned for their jobs and businesses. To this class of the population, let it be said, there is wriggle room and breathing space. Conservation of everything is the name of the game. Americans are doing just that, which is a good thing. Habits are changing in this direction and will become ingrained long after the economy improves. Some suggestions:
A. Whether or not there are two income earners or one in a family household, there is money coming in. Spouses losing jobs might be placed on their married partner’s group or family policy, maintaining medical insurance. Prepay all that can be prepaid on life insurance, disability income coverage, medical insurance, and any and all other coverages. Keep everything in force. Increase deductibles where possible and cut costs. This is maintaining the safety net. Save all that can be put aside whether into tax-qualified plans or non-tax-qualifed accounts. Go to the safest money out there: banks, credit unions, money market funds, annuities. Build up to at least eight months of living expenses in savings accounts. Move lots of retirement money into fixed funds and out of risk funds. Making steady contributions to qualified plans cuts taxes and saves money. Nobody has the slightest idea where risk funds are going to go during the next two years and beyond. Taking losses but preserving what one has is better than continuing to ride it out for the mature segment of the population. It can be argued, successfully of course, that if one is young enough, that this can really be ridden out as the risk funds will probably recover in time. This is corporate America after all. Have faith; we’ll recover.
Annuities offer rather safe and very interesting vehicles to put or move money. They are very safe and offer decent interest rates. Make sure to specify fixed and guaranteed plans, with permanent minimum interest rates along with current declared interest rates. It is critical to know that annuities are long term, say, 10, 20, 30 years and more. While results will vary according to future interest rate environments, here is a strategy for the conservative(which is just about everybody): Someone has watched his/her risk accounts decline, from, say, $200,000 to $100,000! Placing what’s left into an annuity($100,000), in about 17 to 19 years, it will all come back or certainly most of it. We’ve run many an illustration, both based upon guaranteed and projected current interest rates and it happens. There is very little or even no risk at all. One will certainly sleep better nights. A tax advisor can can assist in determining net outcomes; and in event of non-tax qualified funding, there may very well be long term recapture of losses initially sustained. Use a professional insurance agent; don’t try this at home by yourself. There are issues of suitability, risk tolerance, compliance, understanding/disclosure, and the like. This technique is more appropriate for the middle-aged; the retired might very well find it unattractive.
B. For those feeling uneasy about their medical protection, consider the blended strategy of group health coverage for the employee and placing the dependents on private individual/family policies(providing that they can pass underwriting standards). Most employers pay a substantial porti
on of the cost of the employees’ coverage. The wake-up call for the employee comes when confronted by the generally very heavy cost for the rest of the family. So, nationally, only about 18% of workers actually do put family on their plan. Some have jobs where both have group coverage; some leave the kids uninsured; others don’t have coverage at all; and still others have private insurance to begin with. There is money to be saved using the blend of group and private where applicable. Do this with the assistance of a trained insurance professional. There are differences, not only in cost, but in benefits, between group and private. Informed decisions keep everybody clear and satisfied. Higher deductibles combined with Health Savings Accounts or in the case of group coverages, Health Reimbursement Arrangements also save money. Licensed professionals need to be consulted to get it right.
C. Make sure that there are some cash value life insurance policies in force; buy some, if necessary. Kept long enough, this type of coverage can come come to one’s aid when one needs money. As time goes on, this becomes still another safe form of savings formation. Individuals have them; companies own them on key employees. Of course, there needs to be demonstrated needs for the death benefits.
D. Shop hard for the best deals available from reputable agencies and insurers for whatever kind of coverage being considered and needed. Very important to the consumer. There are significant differences when comparing similar plans in just about any kind of insurance.
E. While there is certainly much more to be said for the employed, it is best to contact capable financial advice. It is self-evident here that all of these ideas and techniques are aimed at the great middle class. The very wealthy probably already know most of this(although we are quite surprised at times) and are, in any case, relatively unaffected by recessions and even worse economic periods.
3. The Retired And The Disabled. These are entirely different classes of people with special advantages and disadvantages.
A. For the well-to-do retirees, those who have pensions, other tax-qualified accumulations, non-tax qualified monies, real estate assets, collectables, expensive homes without mortgages and vehicles which are free and clear, additional layers of income from special pre-retirement employment benefit programs, it really is a question of conservation, tax planning, commonsense spending, making sure that funds are secure—-see some of the above in No. 2. Again, much of what can be said in an article such as this is probably known to this category of the population: trusts, wills, powers of attorney and appointment, creative beneficiary arrangements, business succession plans in place, proper amounts and ownership of life insurance, and lots of other details best done in conjunction with attorneys. As financial advisors and insurance professionals, we do play our parts and we do them very well, to the great advantage of the clients.
B. We come, once again, to that great middle class, people who have prepared for retirement over a long time, but are not rich and are thus vulnerable. The chief issues here are recovering from severe erosion of retirement and emergency set-aside capital accounts. Certainly it is true that seniors live much longer these days and one of the chief fears they face is running out of assets and income before they run out of life. Rebuilding of assets can be done with annuities and other non-risk or very low risk savings. The chief advantage of the annuity is that it will provide an income that cannot be outlived; this is called the single premium immediate annuity or a deferred annuity that is either annuitized(it can be arranged in these cases that, in the event of an early demise, all of the balance of payments remaining revert to the annuitant’s family) or set up to provide income payments for life without annuitiziation. Obviously, it takes consultation with an insurance advisor to understand all of this and to make the correct selections.
C. As to medical care and medical insurance to secure that care, most seniors have Medicare. Further, most have supplementary coverages through private insurers, sanctioned by Medicare, including prescription drug copay benefits. So those parts are generally taken care of, along with Social Security pension income, supplemented or not by private and company pensions in the distribution phase. For Veterans, do not overlook VA health benefits. The one kind of coverage that is far too often overlooked is Long Term Care insurance. This covers the universal exclusion in just about all of health insurance. This is for those who become not just sick or injured, but actually incapacitated and cannot do for themselves. There is no other kind of health insurance which does this; and a quality coverage does just exactly this: it pays for the care of the individual who is no longer able. Certified Caregivers take over and on three levels—-in the home, adult day care facilities, and institutionalized nursing homes. In additions to providing health insurance benefits, LTCi is also an estate and financial conservation/preservation tool, protecting assets and income. The odds of such an occurrence are right at 50% for an individual 65 and older; for a couple the same ages, the odds go to 70% that one or the other or both will need this kind of care. The average cost of just one occurrence is in the neighborhood of $250,000. So if a person can qualify in the underwriting process, this is coverage that is vital. Naturally, the younger one is, the lower the premium. See an insurance professional. Life insurance for this sector of the population is most likely to be for final expenses. Still, each situation must be evaluated to check for estate tax and related cost clearance. This would involve larger face amount coverage, depending upon the liabilities involved.
3.1 There are some points for the sub-category of the Disabled on Social Security Disability Income and Medicare, preferably with some form of Supplementary coverage, and generally below age 65.
A. Probably the most common form of supplementary coverage for these people is the Medicare Advantage Plan with built-in Part D prescription copay benefit coverages. Lots of these plans are available at little or no direct monthly premium to the beneficiary—-the proper way to express this premium is $0/mo. to the recipient. Some of the Disabled qualify for LIS or low income subsidy that make coverages even better. And some of the Medicare Disabled are dual-eligible, meaning that they can obtain not only Medicare but also their state Medicaid coverage, which then acts as a kind of supplementary coverage for accident and sickness and costs the beneficiary again, $0/mo.
B. This group is reasonably well covered for health insurance, but they are very vulnerable with regard to income/spending/inflation. Usually all they have is Social Security for the Disabled, generally not very much.
C. There are city, county, state, and federal assistance programs out there available to provide caregiver visits, dental and eye care, housing, and a host of other benefits at little or no cost to the recipient. A competent professional can assist in locating such programs. The Internet is a big help here.
To people who have questions, need clarifications, require expanded explanations, request services searches and research, want financial and estate preservation/conservation services, or need coverages and the explanation of them, work with a financial planner, insurance professional, or a fee-based consultant. To be sure, there are many things that can be done to ease the way of just about anyone during this present financial crunch; those of us in this business/profession stand ready to assist. Most of us don’t even charge a fee! Finally, one thing we know for sure: we’re in for hard times and we’ll grit it out. That’s what we Americans do.