When Social Security Trust Fund Runs Dry in 14 Years Life Settlements are Likely to Increase
September 04, 2018
Each September the nonprofit group, Life Happens, launches Life Insurance Awareness Month to educate Americans about the importance of life insurance during the wage earning years.
While life insurance awareness campaigns may have gotten a little media traction, what appears to be stealing the headlines is the doomed future of the Social Security Trust Fund.
We’re glad these two topics are making news simultaneously because it provides an appropriate backdrop to educate Americans about the connection between the two.
We predict that any future reduction in seniors’ Social Security benefits will cause a corresponding increase in life settlement transactions as a solution to fill the income gap.
This is because an increased number of seniors have discovered that once a life insurance policy is no longer required for income protection for their families, selling their policies in the secondary market is often the most sensible and most profitable exit strategy for obsolete policies. The proceeds are used to address a variety of financial challenges, including to enhance their retirement lifestyle.
Depletion of Social Security Trust Fund steals headlines
The recent news coming out of the University of Pennsylvania’s Wharton School of Business is not very rosy. They are predicting that the Social Security Trust Fund will be depleted in only 14 years (by 2032) – several years earlier than predicted.
According to the Penn Wharton Budget Model released several weeks ago, the reason for the difference is the fact that the Trustees' original projections did not reflect the impact of changing economic conditions – especially the growing federal debt which will increase as a result of the recent tax cuts. “Increased national debt reduces resources available for private investment, thereby reducing the size of the wage base that is used to finance Social Security benefits,” the authors explained.
If and when the Trust Fund runs dry, money would still be coming into Social Security through payroll taxes. But many experts believe that under current law those taxes would be enough to pay retirees only about 80% of the benefits they were promised.
What will your status be in 14 years?
While the living expenses for many of today’s retirees come from a combination of Social Security and private investments, any future reduction in Social Security income (as small as it may be) must still be factored into one’s financial plan. Once 2032 rolls around, the impact of even a 10-20% reduction in monthly income could have major consequences on the lifestyle of retirees.
For example, some retirees living in continuing care retirement communities (CCRCs) rely on the income cash flow from their monthly Social Security benefits to pay the facility’s monthly membership fee. Although these retirees may have substantial retirement investments, those funds may be earmarked for legacy planning or for estate planning purposes. In sum, even a 20% reduction in the monthly Social Security benefit will throw the retiree’s overall financial status and estate plan out of balance if they have to come up with additional funds to pay for their residential care in the facility.
Life settlements often a life saver
Over the years we’ve helped many seniors and their insurance advisors tap the cash potential of an unwanted life insurance policy to address a variety of financial challenges.
One case involved a $1 million life insurance policy owned by a 64 year old male with Alzheimer’s disease. His family had been struggling to pay for his nursing home care and other medical expenses in the memory care unit of the nursing home. After tapping their life savings, the family was about to give up hope when they learned about life settlements. As it turns out, they were able to sell the policy in the secondary market for $600,000 which was more than sufficient to pay for the senior’s care.
In another case, a retired business owner with $11.6 million in life insurance coverage was feeling burdened by premium payments for policies he no longer needed. His insurance advisor recommended a life settlement and we were asked to broker the transaction. In the end, the senior received a life settlement that provided him with $2 million in retained death benefit coverage (without future premium payments), as well as an immediate cash payment exceeding $240,000.
Preparing for the future
As the status of the Social Security Trust Fund and public policy initiatives evolve, financial advisors will be expected to counsel their clients on options to fill the income gap as a result of any future decrease in Social Security income. A frank discussion about life settlements should be on the table along with other options.
If you have questions life settlements or would like to discuss a potential case, we will be happy to answer your questions and provide an immediate pricing analysis. Call us at 1-855-768-9085.