This week on The Money Puzzle Podcast Brian Ramsey and Aaron McAndrew talk all about risk management. This is something that we have a dedicated meeting for every single year and the reason we do is that we often find when we have conversations with prospective clients that come in and we ask, how often have you had a conversation around risk? And they say, hardly ever. Risk is a big part of your portfolio and needs to be updated just like your portfolio.
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Speaker 1 [00:00:02] All right. Welcome to the Money Puzzle. I am Brian Ramsey. And sitting right next to me is Aaron McAndrew, the other one of our other partners in the firm. We have two other partners, Chris Vaughn, who’s sitting right over there sipping on his it’s not bourbon today, believe it or not. And then we have Eric Douglas, who’s back there in his office, very working. So anyway, today is all about risk management. This is something that we have a dedicated meeting for every single year. And the reason we did that was because we often find when we have conversations with prospective clients that come in and we ask, how often have you had a conversation around risk? And they say, hardly ever. To some degree they might say, Well, you know, we talk about portfolio risk or something like that, but for the most part, there’s not a dedicated meeting where we’re specifically addressing risk every year. That is something that is a little bit unique to our firm. We actually have a meeting and it happens to be this time of year. So we’re sort of wrapping up those meetings right now and we’re going to transition into our third meeting of the year, which happens to be around tax planning. And so we thought we would do a show based on just content or information or conversations that we’ve had around risk throughout the summer because that’s when we have that dedicated meeting. So Aaron, what types of risk do we have or do we discuss with clients when they come in?
Speaker 2 [00:01:22] There’s several. One investment risk is, you know, kind of go goes in line with what we talk about most of the time. But most clients have assets that they need to protect as well. So there’s asset risk. And then one that a lot of people don’t think about very often is loss of income. So, you know what would happen if and when the time comes that they couldn’t work and they, you know, would lose that income stream that they used to be able to pay for their bills or support their family or whatnot. So we’ll talk about that. And then the other one that we also mention a lot of is the the loss of the life. So if something was to happen to somebody suddenly and they also could go along with protecting an asset, too, because if they had a mortgage or something like that or a larger asset, that they’re going to be paying off. And a family, they could leave money back to help cover those expenses and and that burden.
Speaker 1 [00:02:22] Right. Yeah. All right. So we’re going to tackle all four of those. So let’s first talk about disability, because that’s one that we found that most people hardly ever address. And it only really pertains to someone that’s in the accumulation phase of life. So there’s we always talk about there’s there’s three phases of life now, your financial life, there’s the accumulation phase which is working all the way up to the point to when you retire. That’s the accumulation phase of life. That’s what we’re talking about. The disability insurance is incredibly important, and then we transition from there to the income phase of life. And we’ll talk about that in just a minute. And and then will the third phase of life is the distribution, which is who get your stuff after you’re gone? Right. All right. So disability insurance, we can take a listen pretty quick. So give us give us a little rundown of what disability? I mean, I think most people know, but you never know. So what does disability insurance typically do and how much is it typically cover?
Speaker 2 [00:03:22] So disability insurance excuse me, disability insurance is is insurance that in case something was to happen to you or you’re not able to go to work, perform your daily duties, and you had to you know, you weren’t you weren’t able to do what you’re supposed to do anymore. Then you’re it helps replace that income and it doesn’t cover 100% of what that income would be. Typically what we see on these policies is it would cover up to like 60% of what their income replacement or what their income was at that point. Right. So and a lot of times this these types of policies are available through your workplace. So, you know, there’s standalone disability policies, but there’s also group disability policies that could be a little cheaper but also may not have some of the bells and whistles that the standalone policies have on them, but they’re offered a lot of times through your workplace.
Speaker 1 [00:04:23] Yeah, that is by far the least expensive way to do it is do your workplace and it’ll cover between 60 and 65%, something like that. We did have a client that came in not too long ago. There was a very high income earner and they’re going to cap you out. So you can’t you this guy was making five, $600,000 a year. You’re not going to get that much in replacement income. They’re going to cap you out between 15 to 20000 a month. However, for those that are have lower income limits and that the only piece that I will tell you is if you get a policy from your work policy and you want to add your own policy to it, you’re. You’re. You’re not. You’re not going to get that in addition to. Right. So you can’t get 60, 60 or 60% of your pay. And they’re trying to get an additional 60% of your pay if you get disabled. Through other words, you’re making essentially more than what you were make. That doesn’t happen. They’re going to limit you if you get up a standalone policy, as you refer to it, in addition to it’s only going to get you up to maybe 70%, 72% of your comp. So it doesn’t quite. So there are some there are some limitations to it, but it’s a great if you are someone that has disability or is worried about becoming disabled and you want disability assurance calls will walk you through that. All right. Let’s jump on to life insurance because it’s a big one.
Speaker 2 [00:05:43] Yeah, this is so.
Speaker 1 [00:05:44] Yep. So disability is you’re incapacitated and you’re not dead. So you’re still making. You still making should be making a living for your family. That covers that piece. But let’s transition to where you pass away. And now you need what? So we have. I’ll walk you through this. Well, you know that. You know this. So we have a three step process that we walk clients through when it comes to any life insurance needs that you have. Number one, we need to termine what the purpose is and purpose. There’s three categories, and I don’t care what it is that you come up with, it falls into one of these three categories. Number one is replacement of income. Number two is debt reduction. So take care of all my debt. And number three is legacy planning. Come up with any excuse you need for life insurance. It’s going to fall in one of those three categories. So that’s step number one is we have to determine what the purpose is. Once you determine what the purpose is, then you transition to step two. Step two is calculating the amount that you need. This is not just a wholesale. How many times do we hear this? Get $1,000,000, right? Get $2 million. And I’ll give you a good example that. Just a minute. But that’s not how you do it. You actually count. There’s a calculation that you can walk through to determine what the amount that you actually need. So step number two, system number three is determine what type of insurance you need either term, meaning for a specific time period or permanent insurance, meaning it’s in place. It’s going to pay out no matter what, no matter how long you live. Now, I will tell you this as a disclosure. I’ve been doing this for a long time. I’ve done, I don’t know, hundreds of plans, but I’m probably close to 200 at this point. Not one time in my career have I ever done a financial plan or done any insurance analysis. Life insurance analysis. Where I have come up with the need is for permanent insurance. Never happened. Now, are there exceptions? Yes. Yes. People sometimes want that legacy planning. I want my dollars to go to my alma mater. I want X amount of dollars to go to my kids no matter what happens to me. I understand that that’s where permanent insurance comes into play. But when it comes to a need based in life insurance planning, I’ve never come up with a permanent assurance as a as an option. Now, nothing, I’ll say. And then we’re going to walk through we’re going to walk, see some other things. The other thing I will say that if you well, that’s an example I will bring up and say, go ahead, you say something.
Speaker 2 [00:08:15] Well, I was going to piggyback off of what you just said, where you haven’t come up with that need when we’re talking about traditional permanent life insurance. I would agree. But a lot of the way it’s that I’ve used life insurance in these plans now is these hybrid policies. We’re not talking about that right now, but that is another reason why we would use it. And then that’s where permanent does make a lot of sense because there’s life insurance policies that have long term care benefits. You know, they’ve got a benefit. They’ve got other living benefits that are that are there. Yeah. But also you get the life benefit if something was to happen to you that their money would be able to be passed on tax free. So that that is a permanent type of life insurance policy, that that can make sense in a plan depending on the client.
Speaker 1 [00:09:07] And we do a fair number that we.
Speaker 2 [00:09:08] Do a fair number.
Speaker 1 [00:09:09] We do it. We do a lot of that. We use permanent shares. Don’t think that we don’t we do. Yeah. It’s just when you’re talking about basic need planning for life insurance, it almost never comes up to get permanent life insurance. Why? Because the majority of the time it’s either income replacement or debt reduction. It’s one of those two. Now, are there more advanced situations where we’re trying to create, be creative, to come up with long term care insurance? Absolutely. And that’s where life insurance can play a huge role. I just sold one, I don’t know, two months ago to a client that that’s that’s essentially what we were doing was finding a hybrid policy to provide like long term care insurance. Not specific. Long term care insurance was way too expensive. And so we went the the life insurance route, which can make a ton of sense, but it’s not it’s not for everybody. It’s for a specific type of planning. Right. All right. So. But now let me give you an example of life insurance. So we had a client that just came in, Eric and I actually sat down with him and he and his wife came in and they were talking about needing life insurance. So this is sort of a get to know the client. They were fairly new. And so we had gone through their cash flow planning and then we transitioned over to risk management. So we were talking about all the things we’re talking about right now investment risk, loss of life risk, disability risk, property casualty risk. We’re talking about all this stuff. So we got on the subject of my life insurance and he said, Hey, well, I met with a life insurance guy and he told me I needed $2 million worth of life insurance. Okay, great. So we walked him through our process and said, all right, he may be right, you know, I’m sorry. No, I take that back. He had he had said it was a half a million dollars and getting it backwards, it was a half a million bucks. And he was selling him a permanent life insurance policy. And it was actually a pretty good rate. I mean, it was good policy, good rate, awesome. I was like, okay, great, that’s fine. Let’s walk through the process. So we did. We sat down and said, What’s the knee? And he was his wife was a stay at home wife and he was a he was a breadwinner and made quite a bit of money, was making about $400,000 a year total comp. And so he was, I don’t know, 48, 49 years old, almost 50 years old. And so the crazy thing was we walked through the three step process. What’s the need? They wanted all the debt gone. And then about 40, 30, 40% of replacement of income would have been fine for them because he didn’t live a big lifestyle. And so we and then we did the math. When you do the math on him, it was almost $2 million this year. $2 million is what he needed. Okay. So and then and then we would we said, okay, either perm or permanent insurance or temporary insurance. He needed term insurance. That’s all he needed. And so the funny thing was number two, funny things that came out of it, number one, totally the wrong amount of insurance. So he was woefully own uninsured. So to have made our policy wouldn’t even have wouldn’t have got his wife anywhere near to where they needed to be. It would have barely paid off all the debt, but it wouldn’t have provided any replacement of income at all. Okay. And so the other the other thing that was ironic was because his wife was a stay at home spouse, the life insurance guy said, well, she doesn’t need a life insurance. She’s not she’s not she’s not employed. And then we turned around and said, that’s 100% not the case, right? Yep. And in fact, we we suggested that he put out 750,000 or I think that’s what it was, seven or 50,000 on her term. Insurance is cheap. It was less than a thousand bucks a year. So is super inexpensive. But that’s the point is when you walk through a process, a set process of determining the purpose, determine the amount and determine the type. I can promise you that’s the proper way to invest in life insurance.
Speaker 2 [00:13:08] Yeah. And on top of that, once you get through that process and you get your and your life insurance in the amount and you purchase that, reevaluating that periodically because your life changes all you know, your needs change. Things happen. You have kids, you move, you get a larger home, you take on more debt, whatnot. Things change. And that’s the biggest what you’re talking about. With my being woefully underinsured, a $500,000 life and term life insurance policy may have been great for somebody when they were 25 years old. Right now, they’re 35 years old and haven’t taken a look at their life insurance policy or haven’t haven’t haven’t done any review on their on their risk. And now you figure out they need $2 million or, you know, whatnot. So that’s why we do this.
Speaker 1 [00:13:55] So, yeah, absolutely. And the other thing I must tell you about life insurance, and if you don’t listen to anything else we say during this entire podcast or you’re taking notes, put a big asterisk by this comment right here. If you go see a life insurance sales guy, I can promise you one thing. He may or may not get the number right as far as the value, he may or may not, you know, whatever. But I can guarantee you he’s not going to sell you term insurance. Why? Because you can’t make a living selling term insurance. The majority of what we do, overwhelming majority of the term of the policies we write our term because it is the right thing for the client. We don’t really make a whole lot on it, but it’s the right thing for the client. So if you go see a specific sell a life insurance sales guy not going to sell you term because you can’t make a living. So they’re going to push permanent insurance on you and they’re going to make it sound awesome, like the greatest investment in the world. And I can tell you right now, I can show you that if whatever you’re paying for your permanent insurance, I can sell you or we can show you. The same amount of death benefit in a term policy. Reinvest the difference in premium per year and you’re going to be far wealthier in ten, 15, 20 years than you ever would by putting money into a permanent policy. And if you don’t believe me, call me. Come in and I’ll show you exactly what we’re talking about. I just it just baffles me to no end. And there is a there’s a group here in town and that and it’s you know, they all they do is sell permanent insurance. It drives me nuts because we see policies come in. You’re like, you don’t need that. You don’t even need that. But anyway, on on with that now. So the the other piece we’re going to talk about kind of briefly here is about investment risk, right? So why is it we talk about investment risk and what’s going on in today’s world that involves investment risk?
Speaker 2 [00:15:55] So it’s funny you asked that because if we were to ask this question to clients on market years that we’ve got the stock market up 20 plus percent, you got moderate portfolios up 15, 16%. You know, and you’re asking the client, you’re doing the risk assessment with them and everybody’s good with it. You know, I want to be more aggressive, but really the answer you get. But you look at market years like this year where we’re dealing with something that we haven’t seen in a long time, you know, and you’ve got portfolios. We get the bond market down and get the stock market down. You got portfolios down 20 plus percent. You got moderate portfolios down in the teens, you know, and now you’re reassessing investment risk. And you got people that are saying, oh, well, I’m a little antsy about this. Right? So that goes in in line as to why we do this, because while we know through the plan that there’s going to be ups and downs through the way, and we plan for long term, not for one year, not for three months or six months or whatnot period of time. But we help build insurance into this and a portfolios to help protect a portion of that portfolio against market risks.
Speaker 1 [00:17:06] So yeah, absolutely. And again, that’s exactly what Aaron just said. There is investment risk with any and anything you invest in. There’s risk associated with that. Now, you can minimize that the best you can. You can’t 100% escape it. You can’t. But we can best we can minimize that the best we can. That is why we dedicate a meeting every single year to talking about risk. And part of the conversation around risk is, is portfolio risk. We have specific software that we use to analyze portfolio risk. And when somebody comes in, especially this time of year, which is really sort of our May through August, a meeting middle of the year, we literally sit down with every single client and say, here’s your risk score. Is that still appropriate? And you wouldn’t believe there are people who said, Yeah, I actually want to change that. Okay, great. It’s great time to do it. Let’s get it changed.
Speaker 2 [00:18:01] Like I said, on aggressive years, they want to be more aggressive and on, you know, years that it’s not the market’s not performing well. They want to be more conservative. So.
Speaker 1 [00:18:09] Right.
Speaker 2 [00:18:10] It it does change. Risk tolerance does change. But these are these are especially good years to assess what someone’s true risk tolerance is. Right. Because, you know, years I think you would agree that what we’ve seen in the last ten or 12 years with market performance has been an anomaly. I mean, we don’t typically see, you know, S&P 500 average and 16% since I think 2009 is with the statistic that I saw. That’s why everybody wants to be aggressive when you see, you know, years like that. Yeah it’s this kind of puts risk back into check yeah so.
Speaker 1 [00:18:44] Yeah and so I guess the point of this conversation is really it is all about risk. You need to have a specific conversation about risk, loss of investment, risk, property risk, loss of income risk. There’s all this good stuff that we that we, you know, we continue to talk about because it’s incredibly important to make sure that you’re covered and then you have the proper amount of coverage. Which leads us to our fourth point. In our last point we’ll do this kind of quickly is we actually partnered with McCormick Advantage. And you guys, if you haven’t seen that video, we did a podcast with Heather McCormick, which is one of the principles she actually looked at here in our office. But the reason we partnered with Heather and her husband Chris is because we want to make sure our clients are covered from all aspects of risk. So we’ve got everything covered. And one thing we didn’t have was property casualty. We want to make sure that your life insurance I’m sorry, your auto insurance and homeowner’s insurance, your umbrella policy are all matching the coverage limits that you have and that we also want to make sure that you’re paying a fair price for that particular coverage, because really, when it comes down to it, you just want to pay the. Minimum for the for the best covers. Right? Right. And so that’s what. So every single year around this time, we as close to give us copies of their current coverage. Or if they’re already with us, then we just have another hey, we have Mr. Ms.. Smith coming in. Can you just go back and, you know, and do an evaluation? So do the evaluation, provide us a report. We talk about it. If it’s someone that is not currently with Heather and Chris, then we ask them to bring in their policies. Heather puts a great analysis together on what their current coverage is versus what they could pay somewhere else. And I will tell you, we’re saving people. I don’t know, Chris. We have somebody came in today. It was thousands of dollars, right? Yeah, 1300 bucks. We saved him. Yeah. And we increased their coverage limits for that. And so but we still saved them 1300 bucks. So, again, property casualty is huge along with everything else that that we do during our risk management meeting. So any final thoughts?
Speaker 2 [00:20:57] No, I think that covers it. I mean, one thing added to them is another big reason why we like working with them is that they’re independent agents, just like we are as independent advisors. So they’re not held captive. They don’t they’re not they don’t have any loyalty to one particular insurance firm. So they can do a true assessment as to looking at price coverage and all the above on insurance needs.
Speaker 1 [00:21:22] Yep, exactly. All right. So I know we kind of covered everything. We tried to do it fairly quick, but if you have any interest in talking about risk management or if you’re with an advisor that doesn’t specifically have a risk management meeting every year with you, where we’re talking about full risk management, you need to come and see us because that is something that we dedicate to. We think it’s that important and it is that important. It’s just other advisors don’t put the emphasis on that and we do. So make sure you come in and give us a call, come in and meet with us. We’re happy to do a complimentary risk management review, if that’s what you want. Just kind of kick the tires with us. We’d love to walk you down that path. If you don’t if you haven’t had a chance to watch in our other podcast and you just kind of pick us up, go back to go to our website after, I think Mr. Producer or Ms.. Producer will put that in after we do the editing, or maybe it’s already in there. But anyway, just check it out. You can find all of our podcasts, go to YouTube. I think it’s this video. You can catch all our YouTube videos as well. We also have a TV show that comes on every week called The Money Puzzle. Right now it comes on ABC at 1030 on Saturday mornings. That is scheduled to change, or at least we’re trying to get it changed right now to our NBC affiliate. We think we hope we also have another podcast we do that’s fun. It’s called Burgers and Bourbon. We really that’s the title of it. But I think we are calling it more, you know, Friday at the firm. But anyway, we take a bourbon every week and review it, give you give you our opinion. It’s kind of fun, just kind of a fun little thing. Make sure you check it out. But either way, when you’re on your favorite listening device or software or whatever app or whatever you want call it, or if you’re you to just make sure you hit the subscribe button so you’ll get all of our new content. We push that out on a weekly basis and just make sure you like and subscribe. And next in 4842, your other friends that may have an interest in anything that we’re talking about. And I guess that’s it. I guess that’s it for this week. We will catch you guys next week on the money puzzle.
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