Shifting Sands: Coronavirus, Regulatory Changes and the Insurance Business

Shifting Sands: Coronavirus, Regulatory Changes and the Insurance Business

A financial planner of our acquaintance, suffering a bit from e-cabin fever induced by the long New York lockdown, was lamenting her supposedly stubborn clientele.

“It’s like trying to herd cats,” she said, in the parlance of our times, apt for someone living on a farm that boards horses, miniature donkeys and yes, cats. I suppose she knows something of herding in real time.

I’m not entirely comfortable with such talk: clients are our bread and butter, steak and potatoes, sushi and vegan lo mein. Each is a complex case with differing plans, dreams, resources, and family baggage. It’s our job to tote it; we’re only here, and paid, after all, to serve.

My farm-based financial guru concurred, but averred, “The trouble is, they all have different minds, and they’re always changing.” Therein lies our professional challenge, to be sure.

How do we do it – how do we get our minds right for the task? Decades ago in college in Washington DC, I was instructed by a teaching assistant working on his Ph.D. in anthropology. To fund his higher education, he worked as foreman on a series of construction jobs – as a Marine and Vietnam veteran, no job was beneath him. His clients were all in the wealthy suburbs – demanding, perhaps even unforgiving customers.

With a crew of rough-edged craftsmen and laborers, he said, meeting deadlines and achieving uniform excellence was a challenge. You couldn’t get everyone to bend to your will, he said, and you shouldn’t even try. “Everyone dances in their own style, and that’s fine. You just need to get them swaying to the same rhythm.”

Good advice for any executive, but I would note that we’re all dancers. Clients, with whom we’re entwined like Fred and Ginger, are indeed changeable and prone to suddenly shifting their footwork. The economy bumps and jolts us on the floor, even in the best times, never mind today. The government reforms and we adapt. In 2020, we’ve had more than the usual share of tempo changes, and the most twinkle-toed are struggling to keep up.

Our year began with the SECURE Act, which went live on January 1. Congress aimed at increasing access to tax-advantaged retirement accounts to help citizens fund what medical and actuarial data suggest will be an extremely prolonged old age. Poll data shows that Americans are worried about outliving their money, and the law hoped to address their sensible concerns.

The Act introduced a host of useful adjustments and improvements to the laws and regulations governing our work, but one provision essentially eliminated the tried-and-tested stretch IRA strategy. Many high net worth clients were left in the lurch, with their advisors struggling to cope.

The initial IRA account could still enjoy tax advantages, but most beneficiaries would now have to follow a 10-year rule. Under the ‘stretch’ strategy, the inheriting party could spread the required minimum distributions (RMD) over their life expectancy, limiting any adverse tax consequences. Now, most inheritors would have a ten-year window: no RMDs, but at the end of the period, the entire balance had to be withdrawn. Failure to comply would mean an automatic disbursement of the entire IRA account, potentially triggering a painful tax event.

In the early months of the year, planners, advisors and insurers toiled to adapt and adjust – old familiar tunes on everyone’s playlist. Just as the kicked-up dust was settling and we were moving forward with our clients – bolstered by a robust economy and hard-charging markets – the coronavirus went global. The opening days of 2020 suddenly didn’t seem so tough, after all.

Suddenly we had lockdowns, travel bans and remote working for all. We also saw suffering, in hospital beds and across the land as people were laid off, lost hours, missed bill and life insurance policy payments and put many essential tasks on hold. Congress responded with the CARES Act, a $2 trillion relief program, signed on March 27 after passing both houses with broad bipartisan support.

The Act includes cash payments to citizens meeting the income requirement, enhanced unemployment benefits, and many changes to retirement accounts that fall under our purview. The latter provisions are potentially useful to planners and insurers, as they provide enhanced access to funds by clients, which can be used in creative ways to regain the benefits lost when the stretch IRA was vanquished.

CARES supports early withdrawals from retirement plans without invoking the usual 10% penalty. This applies if the account holder, spouse or dependents are afflicted with COVID-19 or if they suffer “adverse financial consequences” from the outbreak. The waiver applies to IRA, 401(k) and many qualified retirement plans, as well as annuities. The maximum withdrawal is $100,000. The 20% withholding cancelled, but taxes must be paid on the funds over three years. In the same period, the money can be repaid to the account without applying to the usual contribution limits.

Retirement account holders can now borrow up to 100% of the vested amount in their plan. Previously, the limit was the lesser of 50% or $50,000. Additionally, the CARES Act doubles the loan limit on employer-sponsored retirement plans to $100,000. However, employers who offer such loans are not legally required to comply with this change, as many are cash-strapped themselves.

For 2020, retirement account holders can forgo the usual RMD. Markets are broadly down and while recovery can be expected, no one knows when or how long it will take to emphatically bounce back. If a client can live without their RMD this year, it would allow more time for the underlying investments to recover. Since RMDs are taxable, holding off would also limit taxable income for this year.

Insurance industry groups generally welcomed the CARES Act, but some have banded together to call for establishment of a Recovery Fund, similar to the one established to help businesses in the wake of the 9/11 terror attacks. They say a federally provided fund would help them retain and rehire staff, keep up benefits and cover normal business expenses in times of great strain.

In recent months, insurers have been laboring in an environment of poorly performing portfolios, declining premium volumes, late premium payments from customers, and pressure from state governments to cover coronavirus-related medical expenses, despite the fact that pandemics are explicitly excluded from most insurance policies. We hope they will gain the same understanding and support that the general population has thankfully received.

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