When She is the Breadwinner

Fast forward a generation, and things are a lot different. The girls who were born when that move came out are now going to university – and pursuing advanced degrees – much more frequently than their male cohorts. Meanwhile, women are increasingly moving into career areas that were formerly male-dominated – but men are making few inroads into formerly female dominated professions, such as education and nursing.

Additionally, the recent housing and mortgage crisis has caused the economy to shed hundreds of thousands of construction and trade jobs. The weight of the job losses of 2008-2010 fell largely on these traditional male occupations, as well as manufacturing. Detroit, home of the old Big Three auto companies, took it on the chin – along with hundreds of thousands of auto workers – most of them men.

These were more than just jobs. These were identities. Millions of men have had their self-identity as providers and their tickets to the middle class lifestyle for their families either threatened or destroyed in the last recession. And although the economy is beginning to sputter towards a halting, tenuous recovery, much of the recovery is taking place in the more female-oriented service sector. Those jobs in construction, the trades and manufacturing have not been coming back. Manufacturing may never come back.

These changes are going to be very long lasting, and are going to have a profound effect on the family unit. Our 20 and 30 something married couples are frequently starting families with the woman earning much more than her husband.  Many of these husbands will never catch up with their spouses.

Consider: In 1970, 80 percent of men between the ages of 25 and 64 were in the work force. Today, that percentage is down to 66 percent. What happened? Layoffs, discouraged workers, extended unemployment benefits, career students, incarceration, and larger numbers of young men “checking out” of the usual career and family path to enjoy gaming and other slacker activities well into adulthood.

Meanwhile, women now make up half the work force, and 80 percent of college educated women are working in some capacity.

We are also seeing more and more households where neither spouse necessarily works an 80 hour work week, but both spouses work, and share financial responsibilities as well as child-bearing responsibilities.

That’s already had a big impact: As Elizabeth Warren documented in her 2004 book “The Two-Income Trap,” these families have already bid up the three-bedroom home in good school  districts to unsustainable prices – but were insufficiently financially robust to keep the home for long once one spouse was laid off, or had a substantial income reduction.

What does this mean for financial planning? Well, the basic questions are still the same. It’s still a matter of matching means to ends and ends to means. But the process changes somewhat:

• Women have far more power and say in spending decisions – since they earn more money.
• Women are more likely to want to maintain separate checking accounts from their spouses than in the past.
• Spending decisions are therefore less collaborative. While households are less likely to suffer a 100 percent loss of income when both spouses are working, they are more likely to suffer a 30-50 percent income hit from a layoff.
• Men are taking on more and more child-rearing and household responsibilities as women spend more time in the workplace.

A recent book by Liza Mundy, The Richer Sex: How the New Majority of Female Breadwinners Is Transforming Sex, Love and Family, takes a closer look at the changing psychofinancial dynamics between the sexes.

Her take is similar to mine – this is a sea change in family dynamics – as important as the advent of affordable birth control and the invention of widely affordable labor-saving devices earlier this century, which freed up hours of time each day for women who two generations before were hauling buckets of laundry down to the river all day and hauling water back up the hill. The socioeconomic effects of these changes aren’t going away any time soon, and all of us in the financial planning community are going to have to be cognizant of these dynamics going forward as we advise our clients on how they might handle dealing with finances in their own homes.

Should You Buy Life Insurance on Children?

Nobody likes to contemplate the death of a child. We’d all like to assume that our children will outlive us. Nevertheless, it does happen, from time to time.

Over the years, I’ve found that some families are more open to considering life insurance on a child than others. The reasons are usually cultural or emotional, and sometimes parents will respond very negatively to even bringing the subject up. And you have to respect that. So much of financial planning involves dealing with emotionally touchy subjects as it is –and one’s money should be a servant of one’s own ideals.

That said, I am a believer in parents holding a very small life insurance policy on a child – for a number of economic and financial reasons. Let’s take, as I’m fond of saying, a closer look.

Death Benefit. First and foremost, the dominant reason to purchase any life insurance policy is always for the death benefit. True, unless your little one is a child actor or model, chances are she isn’t going to be much of a breadwinner. Indeed, they tend to be bread eaters, rather than breadwinners, for an inconveniently long period of time.

But that doesn’t mean the family doesn’t have real, material financial damages when the unthinkable occurs, and a child dies. In the real world, the financial burdens are heavy – especially since they primarily affect young families just starting out. Few parents of very young children can withstand the sudden and simultaneous effect of the following routine expenses:

Final medical expenses. Insurance doesn’t cover everything – especially if you’re on an 80-20 plan or one with a high deductible. Further, doctors are usually willing to undertake aggressive and expensive medical treatments and surgeries to potentially save a child’s life. The parent is responsible for anything the insurance plan doesn’t cover – and these costs can be very significant, even with insurance.

Funeral expenses. These can be very pricy, as well, and can rise into the tens of thousands of dollars. Older folks tend to “pre-pay” funeral expenses in exchange for a discount on funeral and memorial services, markers, etc. This pretty much never happens with children. Parents pay full price. (If you are active in a church or synagogue, they will typically help you, though, if they have any kind of a budget – just as you would help others in your congregation in a similar situation.)

Time off work. This is a frequently overlooked expense. But one or both parents will likely want to take some time off work after losing a child – especially if there are other young children in the home who will need a little TLC for a while. A month off work for two parents can easily mean $6,000-$10,000 of money you don’t earn – on top of everything else.

Any time survivors would experience a significant and severe financial hardship from the unexpected death of another, I think life insurance is worth a look. And children are no exception. Parents who choose not to own a policy, or who avoid the question altogether, are simply taking on the risk themselves, rather than offloading it to the insurance company.

Living Benefits

Here’s something you won’t learn from very many people in the consumer financial media: If you do it right, life insurance on a child works out to be free.

Why? Because if you take out a very modest permanent insurance policy (not term), and you fund it adequately, you will be able to take more in cash out of it than you ever put in it. You won’t profit right away… life insurance is a “front-end loaded” product. That’s how the agent gets compensated. But after a number of years, depending on how well you fund the policy, you should be easily in the black. Keep up the funding with whatever you can afford, and you should have a tidy sum available for college expenses, a wedding present, a down payment on your baby’s first home, a cash graduation gift – or heck, keep it yourself!

Other Factors

I think life insurance is one of the better college funding vehicles out there, for one simple reason: Life insurance is the only savings mechanism that will self-complete, if you become disabled. That is right – if you purchase something called a “waiver of premium” rider on a life insurance policy, and you become disabled and unable to work, the insurance company will take over whatever you had committed to funding.

For example: If you have a newborn baby, and you want to put $100 per month away in a college fund, you can buy a policy on your baby. The cost of life insurance is very low on young children. Just overfund your policy over and above the minimum by $100 per month.

If you write one check, and you get disabled in a wreck the next day, the insurance company will take it over for you, and pay that money for the next 18 years on your behalf. It self-completes in the event the policy payor becomes disabled.

No mutual fund will do that. No Section 529 plan will do that. No bank will do that. Your accountant or stockbroker won’t do that. Only the life insurance industry will do that.

Financial Aid Considerations

If you are concerned about college costs, and qualifying for financial aid, consider this: Cash value in life insurance policies is not held against either you or the student for the purposes of calculating your expected family contribution under the federal financial aid system.

For middle class families who are too well off to get a need-based ‘full-ride,’ but not wealthy enough to pay full price, this can be a critical consideration. Assets in a parent-owned 529 plan count against you and your family when they calculate financial aid eligibility. So does money in private savings (though there are ways to mitigate this by having other family members own some of these accounts, you also have the risk that the family member will use the funds for their own purposes, rather than for college savings).

This money is also available, penalty free, if your child does not go to college, or receives a full scholarship (there are some tax consequences for surrendering a policy outright, however).

Preserving Insurability

If your child ever wants to have a family of her own, she will need life insurance of her own, as well. But there are a lot of things that can happen in adolescence or young adulthood that could make it difficult or impossible for your child to buy life insurance then. For example, a medical condition like multiple sclerosis, depression, alcoholism, drug addiction, cervical cancer, and early onset diabetes will make getting coverage very expensive. A felony conviction as a 19 year-old can blow out a young person’s insurability for years, and possibly permanently.

If you buy a policy on a young child, the insurance company cannot revoke the policy for any of the above reasons. Your child will still retain the right to keep the insurance in force at preferred rates.

Furthermore, many policies will guarantee the right to buy up to 5 times the face amount of the original policy when the child turns 18, 21, or some other age specified in the contract. So you can convert that $50,000 policy on your child to a $250,000 policy when she is ready to take on a family of her own. There are ways to magnify the effect even more than that, using term riders on your baby’s policy. Your agent can show you how that works, and every company works it a little differently.

Where Life Insurance is NOT Indicated

All these are terrific things. But life insurance is occasionally oversold, as well. After all, agents are trying to make a buck, too. They don’t get paid on policies they don’t sell. I’d be careful about buying life insurance for a child under the following circumstances:

• You cannot afford sufficient life insurance coverage for yourself and your spouse.
• You cannot cover all children equally.
• You cannot afford to “overfund” your life insurance policy with extra cash every year. (I would estimate that it generally requires a premium contribution of $3,000 to $6,000 per year or more to really make the strategy work.)
• You are skimping on your own retirement contributions and other critical insurance coverages.
• You don’t need or want the death benefit.
• Your income is not reliable and you cannot commit to funding the policy for more than a couple of years.
• Your life insurance agent is pushing this policy without having done a thorough fact-finder on you and your situation.
• You have medical conditions which disqualify you for the waiver of premium rider (though the policy could still make sense for other reasons).

Life insurance planning is highly fact-dependent. There is no one cookie-cutter answer. If you want an independent look at the question of life insurance for your children, or you simply want to go over your family’s general life insurance plan, college funding plan, or both, call us today and make an appointment!

Student Loan Debt Hits $1 Trillion

While America was focusing on the recent bubble (and subsequent burst) of the residential real estate market over the last decade, another bubble was forming – and we’re only now realizing it. The total outstanding student loan debt has now reached over $1 trillion dollars. That’s trillion with a “T!”

To put it into perspective, American college students owe the equivalent of the annual gross domestic product of entire countries to the student loan system – and the federal government is on the hook, guaranteeing much of it.

That means you, taxpayers.

The problem has become particularly acute among law students and law school graduates. A recent study found that the average level of post law school student loan debt reached over $135,000 at some 17 different law schools, according to U.S. News and World Report.

What’s worse, the recession has been devastating to young lawyers with limited natural markets from which to recruit revenue for their firms. At some law schools, fully 90 percent of their young lawyers cannot earn the kind of money that it will take to stay current on these loans.

• John Marshall Chicago: $165,178
• California Western: $153,145
• Thomas Jefferson: $153,006
• American: $151,318
• New York Law School: $146,230
• Phoenix: $145,357
• Southwestern: $142,606
• Catholic (DC): $142,222
• Northwestern: $139,101
• Pace University: $139,007
• Whittier: $138,961
• Atlanta’s John Marshall: $138,819
• Pacific (McGeorge): $138,267
• St. Thomas (FL): $137,721
• Univ. San Francisco: $137,234
• Vermont Law School: $136,089
• Golden Gate: $135,645
• Florida Coastal: $134,355
• Stetson: $133,082
• Syracuse: $132,993

The problem is probably worse than it looks – law schools have recently been caught larding up their postgraduate employment statistics by hiring their own graduates to do menial jobs for the school.

The same issues have been plaguing those graduating with mere undergraduate degrees. Young people being young, they don’t often grasp the long term ramifications of loading up with student loan debt to get a degree in art history, literature, comparative religions, psychology, sociology, archaeology and other soft fields without

Few of today’s 18 year olds currently inclined towards the arts and humanities are going to be inclined to think through the endgame. So it’s up to parents to lay things out.

Under current law, federally guaranteed student loan debt is not dischargeable in bankruptcy. So even though today’s law graduates and even some undergrads will matriculate with student loan debts equivalent to an entire mortgage on a house, you cannot bankrupt out of that obligation like you can out of a mortgage. If you default, or if your child defaults, the IRS will take over the collection effort. And while student loan authorities are usually ok with a temporary deferment during periods of unemployment (interest continues to accrue, of course!), the Department of Education will have the IRS confiscate any tax refunds, block future aid and benefits, complicate efforts to secure a security clearance (vital for many jobs!), pepper credit reports with black marks, and even garnish the young person’s wages for up to 15 percent of pay.

Consequently, it’s important for parents to help students form a realistic idea of what will be needed to repay their student loan debts each month – compared with what they can expect to earn in a given field.

For many kids, this is going to mean a substantial narrowing of realistic available majors. Without substantial parental assistance and scholarship availability, degrees in humanities and fine arts – however passionate and talented the student – may not make the same financial sense they did a generation ago.

Students with limited tuition assistance from families should be substantially reducing expectations compared to recent cohorts. And they should be gravitating towards fields where their education will provide them with solid employment prospects and specific skill sets – that include a barrier to entry. Think the STEM fields: science, technology, engineering and medicine. (But even medicine is becoming more problematic, with government guidelines squeezing doctor compensation).

With these student loan debt levels – and without the bankruptcy out that other debtors enjoy, we can expect young people to put off homeownership for years – and possibly put off marriage and child rearing as well. The spillover effect into the general economy is substantial.

To give your kids choices when it comes to college, and to help them avoid painting themselves into a financial corner, you have got to plan ahead. You have got to jumpstart your college savings plan early, while adequately funding retirement at the same time. Otherwise, the real choices your student will have in his or her late teens and 20s will be narrow indeed.

If you’ve been putting off thinking about it until the perfect time, that perfect time ain’t coming. Now’s the time to get started. Yesterday was better, but we’re all out of appointments. Tomorrow works, too, but not two tomorrows from now! Get your savings plan underway!