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A young man, recently commissioned in the Navy, was sent to me by his prospective father-in-law, a classmate of mine. This lad had some serious questions about which he felt deeply. Having planned a career in the service—and with his eye on a certain young lady—he posed this question: “How can the professional military or naval officer provide for himself and his family in the future with rampant inflation, quixotic economics, unbalanced budgets everywhere and spreading socialism—if he has only his service pay?”
A look at his problem disclosed some interesting additions to estate-planning since the beginning of my own career. The Special Government Life Insurance of SI0,000— formerly free, but now a bargain at $2.00 per month—Social Security, and the Retired Serviceman’s Family Protection Plan (RS- FPP) were items in this group.
A primary requirement for solvency is cash. I recommended that my young friend point toward a ready fund of $1,000.00 as soon as possible. This was designed to keep him on a pay-as-you-go basis, thus eliminating the horrendous interest-carrying charges that his credit-mad countrymen pay. Another reason for this was to establish his credit standing. Thus, in future (when real estate or some other capital investment requires borrowing) his financial character will be established and he will receive the most favorable terms.
Next recommended to the young officer, was the consideration that his savings stress, percentage-wise, the purchase of such life insurance as he needs during the early years of his career and marriage (when his income was lowest and his costs most favorable), then shifting emphasis to investments as his income and experience increased. See Figure 1.
Life insurance was given an early priority, since it is the choicest estate-plan tool for professional men with no assets, but with promising rising income. Recommended was a mutual-type company (for best net-cost results) which had assets in excess of one hundred million dollars; had at least 50 years of successful experience; and was licensed to operate in both the states of New York and Massachusetts. A number of outstanding companies qualify.
Next, we needed a contract to secure, among the usual guarantees, the following:
• No war clause
• No aviation restriction
• Premium waiver in event of disability
• Guaranteed future insurability (the option to obtain future additional life insurance without physical examination or occupational qualification at ages 25, 28, 31, 34, 37, and 40 and/or at marriage or on the birth of a child).
Most quality companies can fill these terms in normal times.
The contract selected was a straight life or ordinary life which the dean of American insurance scholars and actuaries, M. Albert Linton, calls “a term policy which can be continued as long as desired.” This contract was selected because the key to The Plan For All Seasons is to use the protective vehicle of permanent life insurance to build through 20 or 30 years the cash sum required to pay in full for the Retired Servicemens’ Family Protection Plan, which the author believes is
ing:
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Figure I—July 1969 PERSONAL SCHEDULE
Age | Rank | Status | Base Pay {month) | Savings 15% | Life Ins. month | Ins. % | Savings {month) | Savings % |
22 | 01 | single | $ 386.40 | $ 57.96 | $29.27 | 50.5 | $ 28.69 | 49.5 |
24 | 02 | married | 534.00 | 80.10 | 44.17 | 55.2 | 35.93 | 44.8 |
25 | 02 | 1 child | 641.40 | 96.21 | 59.47 | 61.8 | 36.74 | 38.2 |
26 | 03 | 2 children | 741.60 | 111.24 | 75.19 | 67.6 | 36.05 | 32.4 |
30 | 04 | 2 children | 833.70 | 125.06 | 75.19 | 60.1 | 49.87 | 39.9 |
42 | 05 | 2 children | 1,218.30 | 182.75 | 75.19 | 41.2 | 107.56 | 58.8 |
43 | 06 | 2 children | 1,347.00 | 202.05 | 75.19 | 37.2 | 126.86 | 62.8 |
48 | 06 | 2 children | 1,546.20 | 231.93 | 75.19 | 32.4 | 156.74 | 67.6 |
the finest tool Congress has granted the Armed Services for family protection. As further reading will disclose in the case of the Young officer, we built in flexibility, targeting the end of 20 years, 26 years, or 30 years of commissioned service as terminals.
Term insurance was eliminated from con
sideration because of excessive cost (if death did not occur early) and the failure to provide cash as required above. This may surprise some readers who have been bombarded with the “Buy term and invest the difference” propaganda. Term insurance simply doesn’t do the job required by The Plan For All
Schedule C
Schedule B
ESTATE PLAN for
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ESTATE PLAN for
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CASH | ’ r 49,000 | F> SxSk- , bKV.jrtfy | |||
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EMERGENCY MORTGAOE EDUCATION FUNDS ___ /A. | 410,000 S,St-U- *\0,000' Io,too(0(sltr4t4) Vi ’/*<?/? 114/ | n. F | <r r . _______ | ||
IV- f | 3 "4\0 4 | i t | l Me | iLipr | |
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Seasons, and too many of the term advocates really don’t know the difference between investments and speculations.
Of course, we looked at group term. It provides large protection at small cost; but it failed to qualify because all of the master contracts we studied could be cancelled if all the contracts were cancelled. Many outstanding companies sponsor these group contracts, but they all provide the escape hatch that would permit dumping the deal if excessive losses (e.g., during war) introduced discriminatory penalties against the other policyholders—which is prohibited in the states of New York and Massachusetts. For temporary or short-term use, such a contract conceivably could be useful, but it could not qualify for a permanent position in The Plan For All Seasons.
The figures in the schedules on these pages are for a mutual ordinary life plan based on the 1958 Commissioners Standard Ordinary table of mortality and interest at 2-1/2 per cent. As can be seen in Figure 1, our young friend enters service at age 22. He is advised to take the SGLI of $10,000 at $2.00 per month and count it as a present from Uncle Sam. We show its benefits but do not count it in the budget. As an ensign (01), the initial base pay of $386.40 per month enables him to save $57.96 per month if 15 per cent is put aside. Of this, 49.5 per cent, or $28.69, goes to savings and 50.5 per cent, or $29.27, buys him $20,000 of preferred risk ordinary life. He can waive premiums and he has the guaranteed insurability option to get an additional $10,000 of insurance at ages 25, 28, 31, 34, 37 and 40 or, in the earlier event of marriage or a child’s birth in the family, which automatically opens the next option. This contract will be referred to as $20,000 (#1).
Next, at age 24, our man has been promoted to Lieutenant, j.g. (02), with an increase of pay and has married the 21-year-old girl of his dreams. He exercises his option to purchase $10,000 additional ordinary life at
Schedule E
Schedule D
, fitr4 CScHhfihder (30 S9//\Q») oap.At'
luife, two CkiUrn -ySMWP'J'joG'*'pA"5,
ITEM | DESCRIPTION | SOURCE | |||
CASH | .. ys'o ^Cleanup CMo, * Z55 r ji 3,000 | U- 3X.S*.. to wojgratj | |||
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EMERGENCY MORTGAOE EDUCATION FUNDS _______ M | sf IO/OOO - S-ficd 5 ia ooo-Cocu M p M________ \SM_____ a | -.1. n -z* .rSocAc.. m io h- f |
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EMERGENCY
MORTGAGE
EDUCATION
FUNDS
DESCRIPTION
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ng age 24 (hereafter referred to as $10,000-24 :ed (#2). His insurance budget increases to $44.17
ith per month, or 55.2 per cent as against savings
m. of $35.93 per month (44.8 per cent.) Should
in this young married man die after these arise rangements are made, Schedule A shows that
ive his young widow will have clean-up cash of
de. $3,505, emergency funds of $20,000, and in-
iv- come—if desired—of $316.00 per month to
im age 62 and $455.00 per month for life there-
an after.
:ed About a year later, say in 1972, the first
ial baby is born into this new family and the
37 proud father exercises his insurability option
r a to add another $10,000 of ordinary life at age
lly 25—hereafter referred to as $10,000-25(^3).
be His insurance budget now takes 61.8 per cent
of his savings or $59.47 per month while his co- savings gets the balance of $36.74 per month,
in- Lest the reader think this is out of balance, he
>ld should be reminded that these contracts are
to building cash sums year after year that are
at available immediately on a loan basis at a
guaranteed interest rate of only 5 per cent. Many service juniors have been helped through the expensive college years by use of this hidden asset vehicle.
Should the breadwinner die at this point, Schedule B shows one possible solution: $3,505 of clean-up cash; $10,000 of emergency money; some college help for the child from Social Security and Veterans Administration; and income of $689.00 per month through the early years and $393.00 per month to age 62 for the widow and a life income of $377.00 per month thereafter.
Our man is promoted to Lieutenant, senior grade (03) in his fourth year of service at age 26, and about this time his second child is born. Even if he were at sea in a war zone, he could exercise his insurability option by reason of this event, and so he adds $10,000 of ordinary life at age 26, hereafter referred to as $10,000-26(#4). .
He is now finished with the purchase ol life insurance. We do not expect that he will
Schedule G
ever require more—but he still holds options on an additional $30,000 (at ages 34, 37, and 40) should he need all or any part for a reason not yet known. His family is also completed. If he now should die, Schedule C shows cleanup cash of $3,505; emergency and educational funds of $20,000 and income ranging from $841.00 per month down to a life income of never less than $389.00 per month as shown.
This officer gains recognition and promotion. Increased pay increases the percentage of his savings in the investment account (since his life insurance costs have not increased since age 26.)
Prior to the 19 th year of his service (for pay purposes) this officer is able to elect into the Retired Servicemens’ Family Protection Plan. He will be wise if he takes Option 3 for $300.00 per month. This means that at retirement he gives up a fraction of his retired pay in return for the valuable guarantees his wife and children can obtain if they qualify. He faces his first crossroad at his 20th year of service. If he continues on active duty ' and dies suddenly, his family is adequately 1 provided for as shown on Schedule D.
Let us say, however, that he retires as a ' Commander (05), after 20 years of service, whether by reasons of health or whatever. 1
Having elected RSFPP, Schedule H shows 1
that he can provide his family with $300.00 ’
per month by giving up $59.20 per month of (
his retired pay. At retirement, he can cancel *
all of his life insurance allotments and direct the company to pay the cash values to him in c the form of income-tax-preferred monthly installments, amounting to $67.77 per month, 1 for as long as he lives; these installments are guaranteed for 20 years whether he lives or I not. This more than replaces the $59.20 per month cost of the RSFPP. Consider further 1 that it requires $87,720 of life insurance to deliver $300.00 per month to a 39-year old v widow. If this officer requires permanent life insurance at his age 42, the $59.20 per month 1
Schedule I
Schedule H
CHART FOR
RETIRED SERVICEMAN'S FAMILY PROTECTION PLAN Option 2)
Member'a Age Years Service %■Q
Wlfe'B Age 3^ Ygst Child \(q
Beneficiary's Monthly Annuity | *>no | 2' | |
Factor | i-1 | Ilk | |
Factor + 3* |
| IMS | |
Cost | m | 20.... _ | |
Member’s Retired Pay | hM | \5~ | |
Reduced Retired Pay | 5A<- |
| |
Life Ins. Req'd for Above Annuity | 57)7 vj |
| |
Life Ins., Age ^2*, Obtainable with Cost | cZLilC |
|
f.) Life Insurance Values
Cash | Mo. Life Income (2D0*) |
| \iA° |
fySt? | a 13 |
| /£££—" |
|
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EMERGENCY
MORTOAOE
EDUCATION
PUNDS
DESCRIPTION
$251
255
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20th vv41 procure him only $21,610 if he can duty Qualify standard. In the event he dies after his
itely retirement, Schedule E shows estate details
^'th the elements we are using. Investments, as a ^ anY> can be used to beef up the picture. If /ice, uis health permits, this retired officer will :ver. Probably seek civilian employment. Possible tows ringe benefits such as group life insurance can 0.00 taen improve the estate picture. With college h of costs mounting (and imminent in this in- ncel stance), this second career employment is a rect 'kely happening if retirement at 20 years n in 0ccurs.
thly If he continues on active duty and is pro- nth, 1T1oted to Captain (06), his death protection
are while on active duty with 26 years service is
> or Pictured in Schedule F. If he retires as a Capper ^a*n with 26 years service, his RSFPP is shown
her ln Schedule G for a $400.00, per month an. to nutty. Again we note that the cash values,
old '''hen translated to a monthly life income of
life «10.79, more than pay for his RSFPP deduc-
nth tl0n of $99.60 per month. Stated another way, his $50,000 life insurance program is more than supporting a $108,992 annuity value to his family besides having furnished vital death protection through 26 critical years of building his career. Should he go on the retired list as a Captain with 26 years service, his death picture is shown as Schedule I.
Let us take our subject through a career of 30 years’ service and retirement as a captain. Schedule J shows the RSFPP. His costs will be $131.40 per month to give his wife a guarantee of $450.00 per month. This would require life insurance proceeds of $116,581 for her at age 49 and this cannot be obtained at his age 52 with the figure of $131.40 per month. The cash proceeds from #1, #2, #3 and half of #4 can repay the officer $131.40 per month which is his cost. This leaves $5,000 from #4 which can be used as protection in Schedule K.
These schedules show only .the benefits from legislation and the guaranteed values of the contracts. (Interest is shown at 4 per
- 10,000 % 6, Iff * *$• '7
ttfct 3,171*
Schedule K
ESTATE PLAN for | HO. | ||
| DESCRIPTION | SOURCE | |
CASH | dSS | M- SxSc- | |
|
|
| |
EMERGENCY M0RT0A0E EDUCATION FUNDS $ | J> Id ,600 1 10 .... lc | i- %... -________ —J& | r |
Sm | f-------------- L | _______ _** | i Me '■ |
| 1-------- |
|
|
MONTHLY INCOME |
| SAW'S | f&MFPP Soc.Sec- TuS. HkllUt Mt* ScMolo J. |
| r \to* | ||
| toll | ||
| * . | ||
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air | * tin*' |
cent, whereas only 2-1/2 per cent is guaranteed—but the 4 per cent is widely used for illustrations since it is actually paid today. Dividends would also add pleasant increases to the incomes shown. And the Plan has not included any help from Investments.
The costly lessons one learns in the stock market can be philosophically charged to greediness, carelessness, or poor advice. The same is often true of life insurance. But the latter has developed over the past 41 years a group of qualified men known as Chartered Life Underwriters (C.L.U.)—a designation very difficult to obtain and warranting to a life insurance man the prestige in his field which an M.D. gives the professional in medicine. It is to be hoped that one day a comparable indicator will mark the competent investment counsellor.
Legislation on retirement must be watched carefully. It is very possible that before many more years, retirement benefits in the service will be on a contributory basis.
Now what about Social Security? I quote again Mr. Linton, and caution amateur actuaries not to quarrel with his facts or his figures. He writes, in “How Life Insurance Can Serve You”:
Speaking of the costs of Social Security brings up a subject about which there is widespread misunderstanding. The OASI benefits now being paid to retired persons, or to survivors, have values far in excess of the taxes that have been paid on their account, including those paid by employers. The benefits are indeed a tremendous bargain to their recipients. And the same situation will continue for many years to come. How can such a result be possible? Who is paying for these benefits? It has almost the appearance of magic.
The explanation is that future generations are being elected to pay the bill. It is an interesting device. Were the payroll taxes sufficiently large to pay the true actuarial costs of the prospective benefits, as would be the case if a life insurance company were running the program, the current OASI taxes would be twice the present percent. Moreover they would greatly exceed outgo creating a huge reserve fund running into hundreds of billions of dollars. The interest on the reserve fund would bear a large part of the cost of the future benefits present workers will receive.
For many good reasons the creation of such a
A graduate of the U. S. Naval Academy with the Class of 1925, Brigadier General Lyon served as an ensign, until his resignation from the U. S. Navy in 1928. From 1928 through 1932, he was an Investment and Securities salesman; from 1932 through 1965, he was a Life Insurance agent. Commissioned a first lieutenant, U. S. Marine Corps Reserve, in 1935, he served on active duty throughout World War II, and retired in January 1963.
reserve is not practicable. Accordingly, relatively low taxes are now being imposed with larger ones to come as we have seen. To date the taxes paid have been large enough to create a reserve fund known as OASI Trust Fund amounting to 27.4 billions invested in government bonds.
The rate of increase of the Trust Fund is slowing down. Benefits are likely to exceed tax receipts in the very near future. In that event, some of the bonds in the Trust Fund would have to be sold, to cover the deficit.
As the tax rates are scheduled, the time will come when they will exceed the true actuarial premiums required to pay the benefits to which young persons then entering the system will eventually become entitled—assuming the benefits remain as they now are. When that time comes it will be most interesting to see what will happen. Will the young generation then coming onto the stage object? The taxes they will be paying on their own earnings may not be excessive in relation to the benefits they will expect to receive. However the taxes paid by their employers will, to a large extent, be required because our current payroll taxes are not adequate to provide the benefits today’s workers are scheduled to receive.
Young people may not like this plan. They may think that total taxes should be reduced to the actuarial level sufficient to provide their own benefits and not kept at a high level to pay for “dead horses.” The difficulty will be that if the taxes should be thus reduced, the system would be thrown out of balance. The total tax income as scheduled would be required to meet the then current heavy outgo, they will therefore find themselves in a box. We wonder whether they will relish it. . . .
These so-called Trust Funds are an interesting item. Tax money paid by both em-
Ployee and employer is dumped into the general fund for all the demands of Congress 5nd an equivalent IOU goes into the OASI lrust Fund in the form of a special government bond. Critics claim that these tax monies should be used to purchase already existing bonds rather than creating additional obligations which require additional money 0r their redemption. They ask if this interesting device is really honest.
We need only examine the schedules out- lned in this study to see the important contributions made by Social Security. If this system gets into trouble, then not only will the Young people above be “in a box,” but the old people who rely on this source of income will also be in trouble.
All of which points to care with the investment account. This may one day be called upon to fill a breach such as the one mentioned. A generation which has been led to believe that the stock market only goes up may in future learn otherwise. Investment in real estate (while a good inflation hedge in some cases) is not likely to be recommended as a mode to the services. The sound and practical professional man will seek sound and practical investment counsel (in the various fields) if he hopes to cope with the uncertainties of the future.
★
A Most Important Message
We were at the airport in Orly, France, en route home.
“How’s the weather out there?”
“Not too good. There are a couple of depressions in Mid-Atlantic, but we can work our way between them. Argentia socked in, but it will lift before we get there.”
“What’s your alternate?”
“Iceland. That’s socked in, too, but they got a good GCA crew.”
“How’s the plane?”
“Okay. Lost two compasses by lightning coming over, but we can go back on the third. Engines pretty good.”
“Are you ready to go?”
“Yes sir, all set.”
As we approached that imaginary “point of no return,” the faithful engines were moaning their beautiful tune, but the old girl was heaving and groaning and flapping her wings. An occasional icicle slapped her carcass. Soup all but blanked out her running lights and flashes of lightning lit up the interior. Interested, I pulled myself forward. Crew in the sack; co-pilot on the stick; pilot’s eyes glued to the instrument panel, hands clasped to his ear muffs, the better to hear some faint incoming navigation signal.
“How are we doing?”
“Doing fine, sir. Mickey Mantle just hit a three-bagger and brought in two runs.
------------------------------------------ Contributed by Admiral Jerauld Wright, U. S. Navy (Ret.)
★ ★ ★
The Same Difference
The Executive Officer for Antarctic Support Activities was a lean, laconic, New Hampshire man. During our training at CB Center, Davisville, he cautioned the men on discipline and cleanliness to prepare for the confined quarters during the long winter on the ice. He warned us that he would place orange peels behind furniture to gauge the intervals between thorough sweep-downs of spaces.
At the next officers meeting, in his most severe New England manner, he informed us that he had observed a cigarette stub behind the scuttlebutt for the three days. W e all shifted in uneasy silence. Then one irrepressible CEC officer protested, But sir, we were looking for orange peels.”
------------------------------------------ Contributed by Lieutenant John F. Clancy, (SC), U. S. Navy