MONEY life insurance

How Life Insurance Policies Deal with Suicide

In the aftermath of a suicide, family members may have financial matters to deal with — namely life insurance — in addition to their grief.

In the aftermath of a suicide comes sadness, pain, confusion and even anger. For family members, though, there may eventually be financial matters to deal with as well.

I don’t know whether actor Robin Williams, who died by suicide this week, carried life insurance.

For family members in general, two policy clauses can come into play when someone they love dies by his or her own hand. If either clause is invoked by the insurance company, the insured person’s family would receive no death benefit, though they would get back the premiums paid for the policy.

The key rules

* The “suicide clause.” Usually, this clause states that no death benefit will be paid if the insured commits suicide within two years of taking out a policy.

Whenever an insured person replaces an existing life insurance policy with a new one, the time clock for the suicide clause is set back to zero and starts over again.

My friend Professor Joseph Belth, formerly the publisher of The Insurance Forum, wrote about a case in the 1970’s in which an Iowa man replaced four small policies with one policy that had a death benefit of about $60,000. Both the old policies and the new one were issued by Bankers Life Co.

The man committed suicide within two years of the issuance of the new policy. The insurer denied the claim under the suicide clause. A lawsuit followed. Four years later, on the eve of trial, the widow settled for $23,000, and also had to pay substantial legal costs.

* The “incontestability clause”. This clause says that if the insured person made misstatements on the policy application, and dies within two years, the company can decline to pay the death claim. After that, the policy is “incontestable” except in cases of outright fraud.

Just as with the suicide clause, the clock on the incontestability clause is reset whenever someone replaces his or her existing policy with a new one.

Families may have to fight

There are plenty of examples where family members had to go to court to collect insurance benefits. Heath Ledger, who played the Joker in the movie The Dark Knight, died in early 2008, just seven months after he took out a $10 million life insurance policy. The New York Medical Examiner’s office ruled that the death was an “accident, resulting from the abuse of prescribed medications.” This raised two questions. Was the death a suicide? And did Ledger have a drug habit that wasn’t disclosed on his policy application?

The insurer, ReliaStar Life Insurance Co., launched an investigation into these questions, rather than paying the death claim immediately. In response, lawyers for Ledger’s young daughter Matilda filed a lawsuit. The case was settled for an undisclosed amount that was less than the full $10 million.

In a less prominent case, Todd Pierce of Montana, who had been fighting cancer for several years, died in a car crash in 2009. The sheriff’s department called it accidental death, and Pierce’s family filed a claim for $224,000 under an accidental death policy he had received through work.

The insurer, Metropolitan Life, denied the claim on the grounds that Pierce had committed suicide. Jane Pierce, Todd’s widow, sued the following year and the claim was eventually paid.

MONEY stocks

The Right Way to Stop Corporate “Inversions”

The Transocean Ltd. logo is displayed on the side of the Transocean Siam Driller jackup rig
Transocean is an American company that changed its registration to the Cayman Islands and then to Switzerland, lowering its tax rate. Munshi Ahmed—Bloomberg via Getty Images

While policymakers try to penalize and shame U.S. corporations from moving their headquarters abroad for tax purposes, they ought to be fixing the country's idiosyncratic tax system.

When I was a boy growing up in Illinois, Chicago Bridge & Iron Co. was a local company.

Today Chicago Bridge & Iron CHICAGO BRIDGE CBI -0.8569% is a multinational corporation headquartered in The Hague, Netherlands. The engineering and construction company is just one of numerous U.S. firms to move their headquarters abroad, either through relocation or by being nominally bought by a smaller foreign company.

Among them are: Helen of Troy HELEN OF TROY HELE -2.161% , Ingersoll Rand INGERSOLL-RAND PLC IR -1.5718% , McDermott International MCDERMOTT INTL. MDR -5.141% , and Transocean TRANSOCEAN LTD. RIG -1.9024% .

Just this week Walgreen WALGREEN CO. WAG -0.5537% dropped plans to follow in their footsteps.

The practice is called “inversion” and all of a sudden inversion is a phrase on politicians’ lips. Senator Dick Durbin, an Illinois Democrat, has proposed banning federal contracts for inverted companies. Treasury Secretary Jack Lew and President Obama have both said they want to discourage the practice, with Mr. Lew citing “economic patriotism” as a reason.

The day that multinational corporations find patriotism a compelling reason to set policy will be the day the tooth fairy presides in the boardroom.

The problem

The root of the problem lies in the fact that the U.S. has an idiosyncratic tax system. If you are a U.S. citizen or corporation and earn money in Germany or Japan, you are expected to pay tax on it to Uncle Sam. Most other countries don’t do it that way. They follow the principle that income is taxed where it is earned.

Of course, corporations have dozens of ways to make sure their income is “earned” in the lowest-cost jurisdiction they can find. I’d like to get Tim Cook of Apple APPLE INC. AAPL 0.6393% drunk and see what he says about this. (To Congress, Mr. Cook soberly insisted that Apple’s big Irish unit exists for operational reasons, not tax reasons.)

What’s at stake?

Let’s put the issue in perspective. U.S. tax revenues currently run about $3 trillion a year. Of that, about $300 billion, or 10%, comes from corporate tax.

Estimates of U.S. tax revenue that would be lost if inversions continue unchecked run to about $2 billion a year. Even if that may be an underestimate, we are looking at a mere drop in the bucket.

Aside from tax revenue, there are other reasons the U.S. should wish corporations to keep their headquarters here. When corporations move their head office overseas, it reduces U.S. power and prestige. In addition, I believe that once a company has exported its headquarters, it is more likely to export jobs as well.

The King Canute conundrum

Mr. Obama and Mr. Lew can take steps to discourage inversions, but so long as the U.S. imposes tax burdens not levied by others, their efforts will meet with limited success. It will be almost like King Canute commanding the sea not to advance.

The U.S. should switch to prevailing practice and adopt the principle of taxing earnings where they are made.

The loss to the U.S. Treasury could be counteracted by offsetting tax increases, such as raising the corporate tax rate. Or eliminate some corporate deductions and tax privileges — of which the U.S. has many.

MONEY The Economy

Why Sanctions Against Russia May Actually Work This Time

Sanctions aren't always effective, but you have to consider the economic force that Europe and the U.S. can bring to bear.

Economic sanctions leveled against Russia last week by the U.S. and Europe raise a question: Is such pressure effective in getting nations to change their behavior?

Sanctions have been invoked more than 100 times in the past 50 years against dozens of countries, including South Africa, North Korea—and even the United States.

They are a middle ground between war and peace. They often succeed in lowering living standards in the target country, but only sometimes achieve their political objective.

Here are a few examples:

Cuba: The U.S. banned travel and most trade with Cuba in 1960, in protest against the turn to communism by Fidel Castro, whose revolution against the regime of Fulgencio Batista succeeded in 1959. The sanctions have been maintained ever since, though loosened a bit of late. They have probably helped to keep Cuba poor. However, they have not induced any major change in Cuba’s communist system.

North Korea: The United Nations imposed sanctions on North Korea in 2006, trying to discourage it from pursuing its nuclear weapons program and to punish it for human-rights violations. There is little evidence that the sanctions have affected the actions of Kim Jong-Il, North Korea’s former dictator, or his son Kim Jong-Un, the current dictator. North Korea has lived with international sanctions on and off since 1950.

South Africa: In protest against Apartheid, a policy of racial segregation and discrimination by whites against blacks, there were various efforts by countries and by private parties to organize sanctions. The United States got serious about sanctions in 1986, during President Reagan’s term, imposing a variety of trade and capital-flow restrictions.

With Nelson Mandela leading a peaceful uprising by the black majority in South Africa, the country repealed most of its Apartheid laws in 1991. While the economic sanctions were not the only factor leading to repeal, they helped to make the South African government take the opposition’s demands seriously.

The United States. In 1973-1974, the Organization of Petroleum Exporting Countries (OPEC) imposed the so-called Arab Oil Embargo, designed to discourage U.S. support for Israel. The U.S. suffered a recession, but it never abandoned its friendship for Israel, or its practice of supplying Israel with advanced weapons.

The new sanctions against Russia—focusing on the banking, energy and arms industries—are designed to make it refrain from supporting pro-Russian separatists in the Ukraine.

There are two reasons to hope that they will succeed. One is that Russia does have important trade ties to Europe. The other is that sanctions work best when the countries imposing them have more economic power than the target does.

The U.S. and Europe together have more than $33 trillion in gross domestic product; Russia has about $2 trillion.

John Dorfman is chairman of Thunderstorm Capital LLC, an investment management firm in Boston. He can be reached at jdorfman@thunderstormcapital.com.

MONEY Planning

When Conventional Wisdom About Retirement is Good Enough

Retirement investing isn't an exact a science. Rather than worrying whether the rules need to be tweaked, just start saving.

What keeps you up at night?

As a money manager, I recently polled my clients on several questions, and that was one of them. Replies ranged from “my bladder” to worries about the Federal Reserve printing too much money.

The most common answer, though, was fear of outliving one’s savings.

For decades, people have confronted the issue of how much they need to retire. Today the topic hits with special force. People are living longer, and the financial crisis of 2007-2009 set millions of people back twenty squares on the economic game board of life.

Now, there’s much debate about whether traditional retirement planning advice needs to be tweaked.

The traditional advice on income, for instance, is that people in retirement need about 60% to 70% of their old annual income to keep roughly the same standard of living. Remember, when you retire, your taxes may be lower, your children may be grown, your commuting and clothing expenses may shrink, and you may move out of a big house into a smaller house or apartment.

If savings and investments were your sole source of income, you would need – again, by conventional wisdom – about 25 times that sum in hand when you start your retirement. That is based on the traditional assumption that you can safely withdraw 4% of your initial nest egg each year and still have it last at least 30 years, regardless of market conditions.

That means if you earned $100,000 a year at the peak of your career, you would need about $65,000 a year in retirement, and 25 times that amount is $1,625,000.

Of course, inflation may increase your costs as years pass. If inflation runs at a 3% clip, a loaf of bread that costs $2.50 today will cost $4.50 in 2034. At 5% inflation, the same loaf would cost you $6.62.

You can offset some of the effects of inflation by your savings and investments, post-retirement. My father retired at 77 but invested in the stock market, logging prices and trends on charts he kept by hand. When he died at 98, his net worth had increased 75% from the day he retired.

Social Security can help, too. Despite doomsayers’ screeds, I believe the Social Security system will be around in 30 years. But benefits may be a little less generous than they are today.

These days, I see a lot of articles by financial planners questioning the guideline that it’s prudent to withdraw 4% a year.

I’ve seen planners argue for anything from a 2.8% withdrawal rate to a 5% one.

Those arguing for a smaller withdrawal rate — which implies the need for a bigger nest egg — say it’s hard to earn 4% a year after taxes without wading into risky investments. Savings accounts are paying a paltry 1% to 2%, and that’s before taxes.

But I think that’s a short-term view. Savings rates probably won’t stay as paltry as they are – just as inflation didn’t stay sky-high, as it was in the early 1980s.

For the long run, I think the 4% rule provides a decent, if crude, approximation.

Let’s be realistic here. Accumulating a pre-retirement hoard of 25 times the expected annual need is an ambitious target to start with.

But it’s something to strive for.

MONEY The Economy

The Capitalist Argument for Renewing the Export-Import Bank

While this bank is a government agency, it levels the global playing field and promotes U.S. jobs.

Having excoriated big-government liberals and tax raisers, the Tea Party has now set its sights on the Export-Import Bank.

To the anti-government Tea Party movement, the bank is just one more government intrusion into things that private parties can do for themselves.

Created in 1934 by President Franklin D. Roosevelt, the Export-Import Bank is a U.S. government agency that lends money to foreign buyers to help them purchase our airplanes, computers, and other goods and services. Since 1945, its charter has been subject to periodic renewal by Congress. The latest renewal runs out in a couple of months.

In the vast majority of cases, the loans are paid back in full, with interest. Last year the default rate on loans the bank made was about 0.2%. The bank earned about $1.06 billion for the federal Treasury.

The bank is not supposed to compete with private lenders; therefore, it specializes in higher-risk loans that private institutions are unlikely to make. Over the years it has financed many large projects, including the Pan American Highway that runs from Alaska to Chile. It was involved in the Marshall Plan after World War II, and in the rebuilding of former Soviet countries after the fall of the Berlin Wall.

Who Benefits?

The purpose of the bank is not primarily to help the countries to whom money is lent. It’s to enable them to buy our goods and services, and therefore to create jobs in the U.S.

Between now and September, the reauthorization deadline, the Tea Party will be arguing that the main beneficiaries in the U.S. are big companies that don’t need help.

When you look at the organizations now lobbying for a renewal of the Export-Import Bank, it might appear that the Tea Party has a point there.

Among the organizations that have been speaking up on behalf of the bank are Boeing, General Electric, the U.S. Chamber of Commerce, and the National Association of Manufacturers.

At this moment, the battle is too close to call. In the Senate, sentiment appears to favor renewal of the bank’s charter. In the House, there is a good chance that the majority will vote for its abolition.

Competitive Landscape

My biggest disagreement with the Tea Party here is that it doesn’t make sense to be an ideological purist and think only in terms of the U.S.

Foreign companies such as Airbus receive a variety of subsidies to help them compete internationally. The Export-Import bank provides an indirect subsidy to U.S. manufacturers, helping their customers afford our goods and services.

Why should the Tea Party attack an institution that evens the playing field, helps to create jobs in the U.S., and makes money for the Treasury?

Harry Reid (D., Nev.), the Senate majority leader, is talking about a short-term reauthorization of the bank, tied to a bill that would fund the government past September 30 — again, for the short term.

A more statesmanlike solution, I’d say, would be to extend the bank’s charter for at least another three years, as Congress has done 16 times before. The most common extension period has been five years. That’s what the administration has asked for this time, and that’s what Congress should do.

John Dorfman is chairman of Thunderstorm Capital LLC, a Boston money-management firm. He can be reached at jdorfman@thunderstormcapital.com.

MONEY The Economy

The Surprising Reason You Need to Save More

While households are encouraged to spend for the good of the economy, history shows that high savings rates actually correspond with strong economic growth.

Does the U.S. save enough?

I’ve heard lots of rhetoric spilled on that question, but few facts.

That’s why I was intrigued by an analysis published this year by Ned Davis Research. The investment research firm looked at seven decades of data and compared “net national savings” with real growth in the U.S. economy.

National Savings

Net national savings is the sum of all the savings by individuals and families, corporations and the government. This number is then divided by gross domestic product (GDP) to get the national savings rate. Here are some of the findings:

* A “high” savings rate of 8.2% or better corresponded with an annual rate of GDP growth of 3.6%, on average.

* A mid-level savings rate of between 2.8% and 8.2% corresponded with GDP growth of 3.4%.

* And a “low” rate of below 2.8% corresponded with GDP growth of only 2%.

The conclusion: “The more money people have in savings, the more money there is to invest, and the better the economy performs,” wrote Ned Davis, head of the research firm.

During and after the financial crisis of 2007-2009, the savings rate plunged into the low zone, and actually turned negative in 2010 and 2011. Only very recently has the savings rate — barely — climbed back into the medium zone.

“The net national saving rate is greatly improved,” Davis wrote, but remains in “troublesome territory.”

Personal Savings

The personal savings rate (leaving government and corporations out of the picture) also deserves close attention. For years in the 1960s and 1970s it stayed near 8% of household income or above. In 2006-2007 it fell to around 3%, and lately has climbed back up to around 5%.

US Personal Savings Rate Chart

US Personal Savings Rate data by YCharts

Is that enough to finance a new boom in the U.S.? My guess is probably not. I’d like to see the personal savings rate resume its historic rate of 8% or more.

What Can Be Done?

Suppose the U.S. wants to improve its national savings rate? What needs to be done? To me, two things stand out.

First, we need to cut the budget deficit, probably through unpleasant but necessary measures such as making Social Security and Medicare slightly less generous. Why pick on these popular and important programs? For a simple reason: That is where almost half the money in the Federal budget goes.

Defense spending, which accounts for roughly 20% of the budget, can’t go unscathed either.

Second, if we want people to save, we need to wean ourselves gradually off the emergency medicine of super-low interest rates that was used to head off a potential depression in 2008. From 1990 through 2008, the average rate paid on savings account was 4% or more almost every year — sometimes much more. Today it’s around 1.75% or less.

No one wants to throw a monkey wrench into the economy’s engine by raising rates too abruptly too soon. But if we want people to save, it would help to pay them something to do it.

John Dorfman is chairman of Thunderstorm Capital LLC, a money management firm in Boston.

MONEY The Economy

Fix Roads and Bridges — Just Don’t Hike Gas Taxes to Do it

Closed-up cracked asphalt after earthquake.
Yiannis Papadimitriou—Shutterstock

Raising the federal gasoline tax targets the groups that contribute most to wear and tear on America's crumbling roads. Yet there are less regressive ways to address the country's infrastructure needs.

Who should pay to repair and improve the nation’s transportation system?

Someone has to. About 10% of the nation’s approximately 600,000 bridges are structurally unsound. Another 14% are antiquated. Tunnels, highways and mass-transit systems also cry out for improvements.

Yet the federal Highway Trust Fund, which is supposed to pay for most of this, is shaky. It has needed infusions from general revenues a few times in the past six years, and will run out of money this year unless Congress gives it a new allocation.

So who will be stuck with the bill?

• Taxpayers at large? This would come through the federal income tax.
• Trucking companies that put extra wear and tear on roads? That might be done by raising tolls on federal highways.
• People who drive a lot? This would involve raising the gasoline tax, as proposed this week by a couple of Senators.

Sen. Bob Corker (R-Tenn.) and Sen. Chris Murphy (D-Conn.) want to raise the federal gasoline tax to 30.4 cents a gallon over two years, from 18.4 cents a gallon at present.

Perhaps mindful of the Tea Party’s growing power, the senators say their plan won’t necessarily raise the total tax burden on Americans. To offset the gas-tax increase, they say, Congress could extend certain tax breaks that have expired or are scheduled to expire.

As one example, they mentioned the deduction for teachers who spend money on classroom supplies. Another example was the federal deduction for taxes paid to states. These deductions may be good or bad, but none of them offer much comfort to people who use a lot of gasoline.

The federal gasoline tax is only part of the picture. When I fill the tank of my wife’s Subaru in the Boston suburbs, I pay about $55. The gasoline itself costs me roughly $48, Massachusetts takes $4 and Uncle Sam takes $3.

If I lived in California I would be paying about $11 in combined state and federal tax for the same tank of gas. It would be about $10 in Connecticut or Hawaii.

Taxes on specific goods and services, such as gasoline or cigarettes, have two main purposes — to raise revenue and to discourage the use of the item in question. Proponents of higher gas taxes often point to the health effects of air pollution and a desire to encourage mass transit.

As a clean-air proponent, I’m tempted to endorse a higher gasoline tax. But it’s a regressive tax, hitting hardest those people who – often by necessity, not choice – have to commute a long distance to work.

It is more logical to have funds for transportation infrastructure taken from general revenue. That way the benefits of each item — defense, Social Security, Medicare, bridge repair, highway construction, and so on — can be weighed each another, and we can decide how much of each we can afford.

John Dorfman is chairman of Thunderstorm Capital LLC, an investment management firm in Boston.

MONEY The Economy

Don’t Count the American Economy Out Just Yet

Sure, China is gaining ground. But that's what they said about Japan a generation ago. And the U.S. remains the world's economic champ in more ways than one.

Now that China has passed Japan in Gross Domestic Product (GDP), some pundits figure it’s only a matter of time before it surpasses the United States to become the world’s economic power.

It’s way too early to come to such a conclusion. Here are the standings as of 2013, according to the International Monetary Fund:

GDP Chart new new In the 1980s, many people felt it was only a matter of time before Japan topped the U.S. Japan had a homogeneous population, low crime, good elementary education, a minimal defense budget, “just in time” inventories, “continuous improvement” in business practices, and a strong tradition of excelling at exports.

But when Japan hit what turned out to be an excruciatingly long period of economic stagnation, the tune changed. All of a sudden people were talking about Japan’s “structural economic flaws,” excessive consultation, inefficient subsidies for rice farmers, and political gridlock.

What it proved was a truth that has been demonstrated over and over – that people are good at predicting anything except the future.

To my mind, the advantages the U.S. has over China are considerable: a free market system, a tradition of rewarding success, peaceful resolution mechanisms for disputes, and best of all a culture of innovation. And while our education system at the lower levels may be so-so, our higher education system is still the envy of many countries.

Total GDP counts for a lot in determining which nations will wield power on the world stage. If you want to amass armed forces, or to send an astronaut to the moon, GDP is the raw material for those achievements.

However, the total gross domestic product doesn’t tell you how rich the average person is. For that, a decent approximation is GDP per person, and the rankings would be topped by the likes of Qatar, Luxembourg, and Singapore.

And even that measure fails to capture the ultimate thing that matters, the quality of life. Close to 50 years ago, Senator Robert Kennedy spoke eloquently about the limitations of GDP.

GDP, said Kennedy, “counts air pollution, and cigarette advertising, and ambulances to clear out highways of carnage. It counts special locks for our doors, and jails for the people who break them.”

At the same time, GDP “does not allow for the health of our children, the quality of their education, or the joy of their play….It does not include the beauty of our poetry or the strength of our marriages, the intelligence of our public debate or the integrity of our public officials….

“It measures everything in short except that which makes life worthwhile. And it can tell us everything about America except why we are proud that we are Americans.”

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