So I am debating a guy who thinks ONLY people who actually paid into Social Security should receive any benefits. He thinks spouses, who did not pay into the system, should not receive a Spousal Benefit off the work record of their working spouse.
I asked him then what he thinks about the Survivor Benefits then because after all a s Spousal Benefit is only 50% of the primary workers PIA. In today’s dollars the max Spousal Benefit will be all of a $1400 a month.
However, a Survivor Benefit is the amount that the primary worker was receiving when he died. It could be as high as $3700 a month if he had the maximum PIA and delayed taking his Social Security benefit until he was 70.
So, in this case, the spouse who paid nothing in is getting 250% MORE than what she was receiving for her Spousal Benefit. I asked this guy, “man, you must really despise the survivor benefit, eh?”
To which he said he stood by his original statement and that only people who paid in should receive a benefit. I had to challenge that and asked him “you realize there’ll be a lot of destitute widows out there if this were the law of the land?”
He replied, “You ever heard of life insurance?”
And now we get into the gist of this podcast episode. My friends, getting a life insurance policy is not the same as going to your grocery store and picking up a loaf of bread. Life insurance is a process the life insurance companies use to maximize THEIR returns, not yours. That means that if the life insurance company feels they are going to pay out more in death benefits than the premiums they receive they simply won’t take the risk to provide you a policy.
So, let’s look at say a 72 year old man. The Social Security life tables say this guy will live another 13 years. In its purest simplicity, that means the life insurance company can expect to receive premiums for…13 years.
A $250,000 death benefit with premiums paid over 13 years means the insurance company would charge $19,230 a year in premiums…again in its purest simplicity.
But there are a couple variables to consider. The first the insurance MUST make a profit or else it will go out of business and NOONE would ever receive a death benefit.
So, they need to tack on whatever profit margins they need to make to that $19,230 in premiums.
Secondly, the insurance company will also be able to invest that premium they receive into other securities, typically, highly rated corporate and government bonds. Those investments will reduce then the premium amount. However, what’s the interest rates on 15 year bonds today? 3.5% or so? Nothing to write home about that’s for sure.
Also, though, is that some of their insured client base will die sooner than the 13 years average which means they need to keep enough liquidity to be able to pay the claims. That liquidity will take away from their overall investment performance and thus increase the premiums the averaged insured pays.
Finally, though, is that the insured doesn’t want the higher risk population, folks with heart problems, on lots of meds, diabetes, obese, etc. That’s too much a risk for them. If you happen to fall into those categories, you’re just out of luck. You’re too risky.
Unfortunately, as you get into your 70s your are more prone to develop health issues, which means you are more likely to die. Insurance companies don’t like that. If the do take you on, it’s going to cost you dearly. But most will just deny you from the outset. So you won’t have ANY insurance.
For those who still are eligible though, because your risk is less than the overall population, the premiums will most likely be quite a bit lower than what we discussed above. But it’s still going to be expensive!
Say it’s a 25% discount to the pure insurance cost we discussed above. You’re still looking at premiums well into the 5 figures annually. Is that something you can even afford?
And now you see why insurance is NOT a solution typically for most older folks. First, they may not get underwritten for coverage. Secondly, it’s doggone expensive!
Which is why you get insurance when you’re young(before you think you’ll need it).