Welcome to EWA’s Finlyt podcast. EWA is a fee -only RIA based at Pittsburgh, Pennsylvania. We hope all listeners of this podcast will benefit as we deep dive into complex financial topics that we will make simplified for you.
And we hope that this really serves as a catalyst so that you can make the best financial planning decisions for your family and also save time. So this week’s episode of the Finlyt podcast by EWA, I’m joined by Ben Ruttenberg.
Ben has the pleasure of working with specifically a lot of really young physician families. So a lot of specialized physicians that are in their first contract just starting attending after residency.
And so today we’re going to talk about risk management planning and why it’s important for young families specifically. So Ben, thanks for joining us. This will be a fun conversation. Thanks for having me.
Looking forward to diving in here. This is a super important topic and there’s a lot of different perspectives out there. So I think it’s important to get our philosophy up. Yeah. I think so. I want to give a quick backstory.
This is a really widely, I guess, controversial polarizing topic in the industry because you have like, there’s really, in my opinion, two ends of the spectrum. You have, I don’t even want to say advisors, more agents that talk about insurance planning only.
And then you have investment advisors that say that investments are the solution to every problem and they neglect insurance planning. So we really take an approach of marrying the two and insurance planning is not part of your investment planning and investment planning is generally not part of your risk management planning.
So one quick backstory and this actually is like, a lot of this is why we started the independent RIA. Ben and I and majority of our team came from a large insurance company. company, Berger dealer before.
And within this culture of this insurance company, Berger dealer, it was risk management planning was like the focus. Like everybody we sat down with had to have risk management planning, which like they should have it on some capacity.
But it was like so oversold, it was the solution to every problem. And so one quick backstory I want to tell. I remember I was in a training this four years ago. And the managing partner of the office, we were going through a case of a young family.
And he had recommended a lot of insurance, like a lot of insurance. And I had asked the question, why would we not fund a Roth IRA first? And he said, well, insurance is based on age and health, which is true.
But you can fund a Roth IRA on your death bed. It was the exact quote. And that like a light bulb went off. And that was just. side note when I knew I shouldn’t be there. But that’s just an example of like, in our opinion, in which we’re gonna dive into, we wanna fund all of these tax -efficient accounts first and risk management planning is risk management planning.
Meaning it is therefore a death benefit or for disability insurance, you know, it’s insurance. And in this scenario, the general agent was recommending a whole, a bunch of whole life insurance as like the solution instead of a Roth IRA, which in our opinion is just so incorrect and we’re very like passionate about making sure that this is done correctly.
So that’s just kind of unfortunately what a lot of the industry still does. And so Ben talked to us a little bit about like risk management planning versus investment planning. The difference is how they fit into a plan.
Yeah, and really quick before we dive into that, that story that you just told is, you know, pretty crazy. And it’s one end of the spectrum talking about kind of the insurance side of things. But like you said, there’s really two extremes on the poll, so to speak.
One of them is kind of the insurance agent and the other one is the investment advisor. And oftentimes I’ll see investment advisors talking to clients that don’t have any risk management planning done and the full extent of their review meetings or their quarterly reviews is quite simply talking about portfolio moves, the cost of the portfolio, waiting in certain sectors and things like that.
So what we try to really stress- That’s equally as bad. That’s equally as bad because a mentor of mine, you know, taught me this very, when I was very, very young and it’s really stuck with me is that an investment account is not a financial plan.
Just like an insurance policy is not a financial plan. So everything does need to be coordinated in one picture. And if you could have the best investment strategy be fully asset allocated, diversified, plan on not using the money for a really long time, be in low cost funds, you could be doing all the right things from an investment standpoint, but if you don’t have the proper risk management planning in place and there’s a death or there’s a disability and you’re not prepared, it’s not gonna matter that you had this great investment strategy because it’s all plans ruined and it’s all coming it’s all coming back out anyway because you need to figure out how you’re gonna live your life moving forward.
So totally totally agree with that and that’s why it’s so important to marry investment planning with insurance planning doing it the right way and especially with young families it’s something that does need to be addressed sooner rather than later.
Yeah no I couldn’t agree more I think that yeah marrying all this stuff looking at a financial plan holistically is like you know obviously in our opinion we’re super biased this is what we do but it’s that’s the best approach and there’s no really other way to do it.
So let’s talk about risk management first couldn’t agree more done properly with the caveat again that should be the first thing you do. So let’s just look at when we break down fundamentally risk management planning.
This is like how do we mitigate anything that could happen. So if we’re talking about a young family, we work obviously with a lot of physicians. So we’re going to talk through like a physician in residency, signing that first contract, and now they’re making real money and what type of stuff they should have in place.
But risk management planning just fundamentally is life insurance, disability insurance. Obviously there’s some like property and casualty insurance that we could talk about too, home auto, umbrella, all of these things making sure that like if there is a huge risk something happens that this stuff’s covered and that this insurance pays out.
So Ben, let’s talk about, let’s just first, let’s talk about, let’s just say a physicians in residency. And so just if you don’t know a physician in residency or fellowship, you know, they’re going through, they’re going through undergrad, they’re going through four years in med school, they’re going through probably four years of residency, give or take, and then maybe they’re going through fellowship after that.
So at this point, they’re in, you know, as they’re going through this, you know, let’s say you graduate undergrad at 22, you graduate if you go right into med school, which a lot of people don’t, that you’re 26, and then four years or so, you’re 30 years old, and then if you do fellowship, like you’re in your 30s already, right?
And you’re not really making money all through, you don’t make money in med school, you’re just taking on loans, and then in residency fellowship, you’re making like 50 grand a year. And then you sign your first contract depending on your specialty, and you could go for making 50 grand a year to 500 grand a year.
So let’s talk about a physician in residency, what should they be thinking about first, and then we’ll transition into them being and attending, signing their first contract. Yeah, no, that’s a great point.
And like you said, this is probably making somewhere around 50 to 60 ,000 a year. So there’s not a lot of disposable income in the budget. Oftentimes, residents are have a rent payment, maybe have a student loan, you know, income based student loan payment.
And they’re just trying to make it work until they until they become an attendant. So from a risk management standpoint, again, all of this is based on your age and your health. So the younger you are and the healthier you are when you apply for life and disability insurance, generally speaking, the better the rates are going to be.
So if you’re a resident, I would say things to think about, again, this is so individualistic and specific to your situations, but generally what we’re seeing is trying to get the most amount of disability insurance, supplemental disability insurance that you can while you’re in residency.
And generally, as a resident, the max that they’ll give is $5 ,000 a month. And so if we break that down, if you’re making 50 and you have group coverage, they’ll pay you 60%. You’re used to living on like $3 ,000 a month probably, and that group policy after taxes may pay you $1 ,000 to $2 ,000 a month.
And so generally they wouldn’t qualify for $5 ,000 a month because they’re not making that much money. But these insurance companies know they’re training to be a physician, their income’s gonna go up.
So they’ll give them that full 5 ,000 before they qualify, which is like a huge benefit. Right, and not to get too down a rabbit hole, but what you just said is a common objection that we’ll often hear from people when we talk about risk management planning is, oh, I have it through work, whether it’s life insurance or disability insurance, and what you just outlined is so true.
Oftentimes with workplace disability insurance plans, they will cover 60% of your base salary, may or may not be covering any bonuses. So if you’re a physician and you’ve got a big bonus compensation structure, it’s something to really look at in your contract.
And also, if it’s employer paid, which most employer disability insurance plans are, that benefit that you receive is taxable. And depending on your income rate, that could be as high as 37%. So walk through that and kind of the implications for what that means.
Yeah, to say, let’s just dive into disability while we’re on the topic. So basically, if we think about that physician example, you’re taking on, okay, so if you have undergrad debt, and then you have med school debt, that could be generally as anywhere between 200 to $500 ,000, obviously, you have both close to 500, could be anywhere like 200.
So if we think about it, you’re taking out debt, you’re leveraging debt to train to be a physician, generally that’s a good trade off because you come out making a lot of money. And so the one risk that could happen other than dying is you get disabled.
And so you’ve taken out debt, you’ve learned to become a physician, you have all this income ahead of you, let’s say 500 ,000 a year for 20 years, however, that’s a huge number of income, it was a huge number, that’s just your biggest asset.
And so if you get disabled, you no longer have that. And that’s what disability insurance covers that. It’s like you are literally covering your income that you just spent all this time and money and effort training for.
So while you’re in residency, no brainer you should get as much disability as they’ll sell you. And it is a cost. It would be probably $200 a month max, but not even a question you should do. And so if we think about, too, another component of that on the student loan example is student loans, let’s just focus on disability and then we’ll talk about life insurance and what happens if you die.
But student loans, right now there’s public service loan forgiveness, which is a 10 -year program where if you are employed by a nonprofit, which a lot of hospitals are, after 10 years of payments the loans get forgiven.
A lot of physicians go that route because if we just think about it, the four years of residency can count. If you do any fellowship, maybe there’s a year or two years or another four years that could count depending on the specialty.
So by that point you’re over halfway done and it’s like, okay, now that you’re just working a nonprofit for a few years, get these forgiven. Ben, what happens if you get disabled and you’re not working?
What happens to your student loans? Right. So that’s a huge consideration that not many think about. So the whole point is to think about it. purpose of being on public service loan forgiveness is that you’re actually working and you’re able to make qualifying payments while you’re working at a non -profit.
So you could go down that path, be at a non -profit, and then if you get disabled, you’re no longer working those payments, then no longer qualify for that loan program. So again, making sure that you have disability insurance in place to supplement against that risk is so important.
Especially if you’re going to be banking your short to midterm intermediate future on pursuing a non -profit for the purpose of getting those loans forgiven, you need to make sure that you’re actually going to be able to qualify for making those payments.
Because if you’re disabled, you’re no longer employed by a non -profit, therefore you’re no longer making qualified payments because you’re not employed and then you have to pay back all of your student loans, which could be like a $500 ,000 swing.
So that’s like, we cannot hone enough how important that is that disability insurance, especially primarily if you’re in a occupation where you’ve done training and schooling and you have a high income, that’s like the first thing you should do, no matter what, buy as much disability insurance as you qualify for, especially if you’re a physician.
So get it while you’re in residency and then that’s generally one of the first things that we recommend if we’re working with a tending in their first contract and they haven’t done that, it’s like this is the very first thing we should do.
So let’s now talk about, this would be a good segue into, well actually no, while we’re on disability, let’s talk about own occupation versus any occupation. So you can get really, we’re not going to get too granular just for the sake of like, it’s kind of boring and dry, but if you analyze these disability contracts by each company, there’s different definitions and so own walk, especially in the medical profession is really important.
So Ben, what does that mean? Yeah, so really two types of definitions that we need to be aware of when we’re applying for disability insurance. One is own occupation and the second is any occupation.
And it’s one word difference, but means a huge amount when you’re actually going to be receiving disability insurance payments based on what you qualify for or what you don’t qualify for. So let’s break both of those down.
The less stringent definition is any occupation. That’s something that we try to avoid for disability insurance contracts. So let’s say, for example, there’s a, you have a cardiovascular surgeon that specializes in, and what he or she does and gets disabled.
If their disability insurance policy is any occupation, it would cease payments when they could do any gainful employment. So not necessarily going back to being a cardiovascular surgeon, but if they could- Work at Walmart.
Work at Walmart, for example, or if the insurance company decides they could do research and earn a fourth of what they were making as a surgeon, then disability insurance payments would stop. And so it’s really important that when we’re looking for disability insurance, we’re looking for medical -owned occupation.
So in that same exact example, you have a cardiovascular surgeon. They get disabled. If their definition of disability is medical -owned occupation, the actual disability insurance payments will continue until he or she can go back to doing their duties as a surgeon.
It doesn’t matter if the insurance company thinks they could do research or they could be a professor or they could work at Walmart, like you said, until they can be a cardiovascular surgeon again, that is when they could then meaningfully go back to work and then the payments would stop.
So really, really important definition. Nothing wrong with working at Walmart, but there’s a huge jump from like, you could be making a million a year to like minimum wage. And that’s legitimately, we wanted to use an oversimplified example because like the insurance company would say, well, you can make, like you are not disabled enough to earn a minimum wage job.
You can do a occupation. You can do any occupation. So we’re not going to pay you this benefit. Whereas, again, not to get too granular in the contracts, but like there are some contracts where it’s like, if you’re making a million a year as a surgeon, you get, I’m going to give you an example, something happens where you can’t do surgery or maybe you’re not able to do the volume you were doing.
So you cut back to like 50%. So now based on your production, you’re making 500 ,000. Well, this policy could still pay out and pay you, you know, on top of what, so basically if you’re making, if you’re doing half the amount of volume that you were doing, you’re making half the amount of money, this policy would pay you on top of that to get you close to where you were before.
Whereas any Oc would not do that. So especially as a physician, the definition in the contract is so important. And all these companies have different definitions and different ways they pay out. We’re not going to get into the specifics of it, but just make sure that if you are analyzing a disability insurance contract, you’re not going to be able to pay out.
contract as a physician that you really understand how all these companies work, what they pay out for, what they don’t pay out, et cetera. Super important. Anything to add on disability insurance or re -jump into life insurance?
No, I think for residents that hits on everything you need to hear is getting the maximum amount you can while you’re in residency, while you’re as young as you are and as healthy as you are, and then making sure that the definition is medical and occupation.
Yeah, I couldn’t agree more. So let’s play out this example then. We’ll say we have a second -year attending physician family. So wife, husband, wife, two kids, we’ll say, for example. And so they’ve gotten the disability insurance in place, and we’re sitting down with them to do a financial plan.
Let’s talk about life insurance. Super polarizing topic in the industry. In my opinion, kind of like the story I told at first, it gets oversold. A lot of agents get… think that it’s a solution to all problems.
So let’s just use this example. Well, first, Ben, talk about what is the difference between term life insurance and then, I mean, there’s whole life, universal life, variable life, life insurance that’s not just an insurance coverage.
It has some sort of account component that grows that you could access. But let’s first talk about the difference between the two. Yeah, no. So really important to understand. They’re very different, and they serve very different purposes.
Generally speaking, for our conversations, any sort of universal life or variable life product is not going to be part of a young family’s recommendation. Very rarely do we recommend that maybe for a super, super specific situation, 99 .9999% of the time, it will not be applicable to what you’re doing.
So back to what you were saying, term insurance, think of it like an analogy that I like to use to help kind of understand it is term insurance is like renting an apartment, whole life insurance is like buying a house.
So term insurance, as the name suggests, is insurance for a specific term. So whether it’s 20 years, whether it’s 30 years, some companies will go to a certain age, so like term insurance until you’re 70, term insurance until you’re 80, so on and so forth.
It works very similar to homeowner’s insurance or car insurance. It’s user to lose it. So if you pay a monthly premium every month, and again, let’s assume it’s a 20 year term insurance policy for $1 million, you pay premiums for 20 years, and if you don’t die within that 20 years, you don’t get $1 million payout to a beneficiary.
And then if you basically, once the policy ends in 20 years, you have nothing really to show for it. So there’s no equity component, there’s no cash value. So that’s the first thing is we want to make sure that the life insurance is for a death benefit.
I cannot stress that enough. There are other uses of life insurance. The primary reason you buy life insurance is to have a death benefit. So if we’re with, let’s play along this young physician family, making half a million a year.
The first thing we want to do is let’s, at a bare minimum, make sure that you have the right amount of term insurance in place. So two components, we’re going to, how we judge this and we base this metric.
So the first, like, back of the napkin rule of thumb is 10 times gross income. So if you have, let’s just use the example, one working spouse. Working spouse is making half a million a year. Generally we want a total of five million.
And the second, and now the second test is we use an acronym called LIFE. And that generally, those two work out to about the same. If we check every box on the LIFE acronym, it’ll get to about 10 times gross income.
So Ben, let’s start there. What do people want covered? What does life mean? Yeah. So generally speaking, we have these conversations with clients all the time. They’re super individualized, but at the same time, it all kind of comes back to a lot of the same philosophy as the clients want to make sure are covered if something happens.
The first one, again, that L in that life acronym is liabilities. So making sure the mortgage is paid off, making sure student loans are paid off. Let’s talk about that for a second. If the private student loans, so if a spouse, if someone dies, if they’re private student loans, somebody inherits them.
So half a million bucks in private loans, other spouse has to pay them. Federal loans, they’re gone. So that obviously wouldn’t be covered in life insurance. So liabilities, OK, now what’s the I? Yeah, I, and this is super variable and super dependent on your family situation, but I is income replacement.
So a lot of times, this could be, depending on the scale, this could be a huge swing in the actual death benefit amount, but depending on lifestyle, depending on how long you want to make sure that this income is lasting, depending on how old you are, making sure that, again, if this example, we have a half a million dollar working spouse and the other spouse is not working, we want to make sure that the family is able to maintain the same standard of living when the working spouse was alive and providing income.
So whatever that number tends to be, we just want to make sure that, again, based on budget, based on cash flow, that is sustaining their current lifestyle. Yeah, I like to just, it’s kind of morbid and people don’t like to think about it, but we pride ourselves on, we have tough conversations that people don’t think about and honestly don’t want to have.
But if I say, I’ll just say, hey, let’s just play this out. Or if one of you passed away, if the working spouse passed away, like other spouses either going back to work, probably if they’re not a physician in this example, they’re not going to make as much money.
So they’re going back to work, but then who’s taking care of the kids? So it’s like, what would need to be in place on a monthly basis to… actually replace that and make sure that lifestyle exactly as you said is not is taken care of and so if they’re 35 years old Probably needs to be in place for 30 years and that could be a huge number and there’s two ways to figure that out you could literally just reverse engineer that come up with that number or You know, whatever they need you just take a lump sum and then take the 4% withdrawal rate So if oversimplified example if they needed $40 ,000 a year Which is a super low number Million dollars into an account spitting off 4% a year would pay them that 40 ,000 forever So that’s what two different couple different metrics we can use to calculate that But basically it’s just making sure monthly expenses are taken care of if something happened Yeah, and what one more note on this before we finish out this acronym is that these are really uncomfortable conversations to have but This is why We’re in business and this is this is our job to make sure that we’re having these conversations It’s it’s our opinion that if you’re Marketing yourself as a financial advisor and doing financial planning and you’re not having these types of conversations with your clients You’re not preparing them for What could possibly happen and you’re not you’re in our opinion?
You’re not you’re not doing your job people want advice on things They’re not thinking about and so I just think about like what do I go to who do I go to advice for on things? And I I want them to tell me things that I’m not thinking about and same goes for clients like they’re not thinking about how much Especially if you’re like a physician or you’re a high -income, you know You’re really into your career You’re so busy in your day -to -day you have a family and like you’re not thinking about like you’re not sitting down And how much you know life insurance do I need over the next 30 years on a monthly basis like yeah So a huge value I couldn’t agree more but let’s go on to the next one Yeah, so f f is final final expenses So making sure that the funeral is taken care of and then he is education so making sure that again in this example We had two kids if you want to fund maybe a hundred percent of a public school that could be anywhere from 20 to 25 thousand a year depending on what state you live in if you wanted to fund a hundred percent of private school That could be anywhere from 50 ,000 to 100 ,000 a year.
So why don’t you walk through? I was gonna just go through an example here. So just actual numbers So liabilities, let’s say a $500 ,000 mortgage And let’s say we’re making 500k a year. So I’m gonna We’ll just show you this how this gets close so five ten times income means total of five mill of insurance, right?
That would be like the back of the napkin, but if we want to say, okay, let’s actually back this up So life insurance let’s just say liabilities are Let’s say they’re a mill. We have a million in liabilities Income you know if you’re making half a million a year you used to probably spend about 23 ,000 a month Let’s say if the liabilities are paid off.
Let’s say you need 15 a month For 20 years So that’s 180 a year times 20 and it’s three and a half million I’m rounding a bit. And then education for two kids, depending on private versus public, that’s probably another half million bucks.
And so literally right there, we have a million for liabilities. We have 3 and 1 half million of income, 500 ,000 of education. What does that equal? $5 million gets us to reach that 10 times income.
So that’s basically how we figure out everything. Obviously, final expenses could be thrown in there, but that’s $30 ,000. It’s a small number in the grand scheme of things. So that’s basically how we figure out how much life insurance coverage somebody should have.
And that’s like, again, with a young family, I mean, that’s the purpose of risk management planning. Like, it’s not, that’s the first thing that needs done. Anything to add? And let’s talk a little bit about whole life insurance.
Yeah, well, yeah. So I guess the natural follow -up question is, OK, we’ve determined for this family’s example, we need $5 million of life insurance coverage. How do we do that? What does that mean?
Does that mean five million of term insurance, five million of whole life insurance? Why don’t you walk us through all that? Actually, that’s a good point. So basically, if you think about the insurance needs, so let’s just say a 35 -year -old couple, kids are young, their insurance need right now is really high, and then their income, assuming their income goes up, the insurance needs really gonna start to increase, but then it’ll get to a point where high -income earners, let’s say, mortgage gets paid off eventually, education’s funded at some point, and then income is a smaller number because they’ve built up savings, and so that number to 65 that income would need replaced is much smaller.
So as you progress through life, your insurance needs are gonna increase, but that’s gonna drop off substantially. So they’re not gonna need that full five million until they’re 65, that’s just not realistic.
So generally, what we’ll like to do is layer it, and so if they need five million, we may do, depending on how granular they want to get, honestly, but term insurance, it’s like we said, use it or lose it, let’s say you have a 20 -year policy, if you don’t die in 20 years, nobody gets any money, the insurance company wins.
If you, however, if after 20 years, you still need insurance, you gotta buy another policy. So we’ll do something along the lines of, let’s say the kids are five years old, so for the next 20, well, let’s say for the next 15 years till the kids are 20 through college, if college is a goal, they need a lot of coverage in place.
So of that five million, we may do something like, okay, three million of that coverage is gonna be level term 20, and so that means for the next 20 years, you have $3 million. And then we’re gonna have a $2 million policy that’s a level term 30.
We like level because that means the cost never increases. There are certain types of policies that as you get older, that the health rating is locked in, but as you get older, it gets more expensive, which is like kind of defeats the purpose of doing it while you’re young and healthy.
So in this scenario, we’ll say, okay, you’ll have $3 million for 20 years. That’s going to get you the kids through college. If the kids are five, they’re going to be 25. You could just drop that. 20 years from now, you’re not going to need $5 million of coverage, most likely, generally speaking.
So drop that. And then we have this $2 million policy. It’s in place till you’re 30. If we don’t have any whole life, we have the option now. We could keep that for another 10 years, or you just drop it, or you decrease it.
But let’s talk about generally what will happen, what we would recommend, and again, so specific, financial planning specific, case by case specific. But some of that will get converted to whole life at some point, and then you get to the point, let’s say, 20 years from now.
You’ve converted some. You keep the whole life, and you drop off the term insurance. And that gives you enough coverage that you would need. But let’s dive into whole life insurance. Like you said, what’s the split?
Primarily the first goal is we want $5 million of coverage. Ben, first let’s just talk about, so we’re not going to get into variable or universal life. There’s just specific examples, like estate planning purposes, different things that you potentially would use that for.
We’re gonna talk about just fundamental philosophy we have on how we position Whole life insurance inside of a financial plan So then talk about so you said term insurance is like renting you’re buying a death benefit if you use it or lose it What is whole life and we’re gonna talk about specifically just a fixed You know cash value inside of a whole life insurance contract Yeah, so like I said turn like you said term insurance renting an apartment whole life insurance like buying a house So bigger monetary Commitment up front with whole life insurance than traditional term insurance But in return you have coverage that lasts forever which really important So instead of a term insurance policy like you said that could last for 30 years or last for 20 years As long as premiums are paid on a whole life insurance contract that coverage will last for your lifetime And in return for the larger monetary commitment up front There is a cash value component that you could access at any time for any reason In that cash again depending on the insurance company that it is with Grows with the general account of the insurance company’s portfolio So it’s not correlated to the equity markets And there are a lot of factors in play in terms of how you can use the money and then if it’s coordinated With your overall investment strategy you can really get strategic with your overall asset allocation Knowing that you have safe money that is growing outside of the stock market inside of a life insurance contract So let’s just like fundamentally a difference for you to get a million dollars of term insurance as a young healthy Somebody in their 30s is probably what $100 a month maybe something something along those lines And so then on the flip side if you were to get a million dollars whole life this stuff’s a lot more expensive You’d probably be paying a thousand dollars a month, but Number one it’s in place forever like you said so you don’t have that death benefit user lose it like it’s it’s there forever And then the second thing is we have this cash value that exactly you just said grows not correlated the stock market Let’s dive into that a little bit more and then we’ll talk about when and how we would implement this.
So the cash value inside of a life insurance contract, basically how we look at this is it is the safe asset on your balance sheet that has contractual guarantees built in and it cannot go backwards.
So like you said, these insurance companies, actually this is a cool side note. If you look at Warren Buffett, who people think is the greatest investor of all time, a lot of his best investments are actually on insurance companies.
He loves betting and not betting. He loves investing in insurance companies. And the reason being is a lot of these insurance companies, they’ve been around since the 1800s. And it’s like if you’re a business that can last 150, 200 years, you clearly know what you’re doing.
So these companies are very strong, very stable, and a lot of the mutual companies, they’re not publicly traded, they’ll pay out of dividend to policy holders. So there’s no stockholders in the company.
If there’s profits, they’ll pay them out back in the form of a dividend to the products that the Policy holders have and so a whole life policy. There’s contractual guarantees so if you buy a million dollars of Coverage on a whole life policy you’re funding money into it this cash value is gonna build up Basically, if you look at the insurance ledger if this if the company never paid a dividend There’s this contractual guarantee that like you go over the long course you can’t lose money So basically what you put into it that the caught the money in that cash is going to be more than what you put into it Over the long haul plus you have the permit death benefit.
It’s always higher than both and so These companies they’re very stable They have this big general account portfolio that’s invested in a bunch of like safe stuff like 90% of it has to be in like Fixed income and then they invest in some stuff since it’s such a huge large amount of money pulled together Private equity these real estate deals stuff that like you and I can’t put money into because it’s billions of dollars sure together And so then based on these general account portfolios super safe There’s a lot of regulation on like how these portfolios have to be structured because again That’s backing all these insurance policies and so they pay this dividend out Historically net of the expenses of the insurance policy could be like four to five percent So again, we only want to do this with a select few mutual companies.
They’re really good, but this Contract could pay you, you know four to five percent After expenses back into the policy and so that basically serves as like the safe asset on the balance sheet So that’s like similar to having cash We’re having bonds or fixed income and we’ve talked about this before on the podcast but 2022 is like the textbook perfect example because 2022 S &P 500 was down over 19% and the bond index is the Barclays bond aggregate was down I don’t know the exact number over 10% it might have been like 13 or something But generally speaking bonds and stocks work inversely meaning if there’s a huge drop in the equity market people flee to safety and bonds Generally speaking, we’ll hold their value.
2022 was the most extreme example where these things both went down that really has never happened. And so, what whole life insurance went up 4% to 5% still if you had a good policy. And so, basically a year like that, that’s where whole life fits in, is like, okay, if you ever need to take withdrawals, you don’t have to worry about what the stocks or bonds are doing.
You can take money out of this contract, or not get super granular into how, but you can take money out without ever locking in losses of your investments. So that’s basically from a high level, how we position it on the balance sheet within the financial plan.
It’s like your safety net that you could access no matter what’s going on. Because if these insurance companies failed, I mean, there’s huge problems in the world and the economy. Because like I said, these things have been around for 150 years, they’re safe, they have regulation, that they have to have these safe investments.
Anything to add on that, Ben? Yeah, and these are all backed by, again, like you said, policy holders that you have to medically… qualify to get a life insurance policy. So if you are in really, really poor health, they won’t accept your application.
So they’re receiving money from people that are going to live for, you know, that, you know. They’re healthy. They’re not just taking anyone off the street that they’re taking money from and giving money to, you know, dividends to.
It’s, they’re really, are really strict insurance, you know, underwriting requirements to actually get a policy, which is why it’s so important, like we said, to get it when you’re young and healthy, because oftentimes when people think that they need something like life insurance, that they can’t get it.
So they’re paying dividends to people that are very healthy that are paying premiums. So yeah, totally. And then also offer annuity products, which like, we won’t get into it, but like life insurance and annuity is like the perfect business model, because then you’re insuring income in life.
And so it just like, basically adds like another layer of like, I don’t wanna say protection, but just like safety to the company’s balance sheet. Okay, so that’s great background on whole life insurance.
Can fit into a financial plan, but we need to be doing other things first. So like we said, first thing, this building insurance, death benefit. Let’s play along the example of the physician. I am gonna make a very strong statement here.
There are very few scenarios where a resident physician or fellow physician should ever own whole life insurance. I feel very strongly about that. I’ve seen so many times where residents and fellows are sold life insurance policies.
And it just, it’s just, and honestly it’s almost criminal in my opinion. So I wanna make that statement very clear. There are exceptions, you know, if they inherited money that I made debt, like yeah, maybe it could fit in at some point, but you should not have that while you’re a resident, you should have term insurance and disability insurance.
and then explain why and I think that’ll just really just be a segue into like what do we want to make sure is in place first before we recommend whole life. Yeah so oftentimes when we sit down with clients we’re talking about education goals for their children or getting to a point where they can be financially independent at a certain age so there are vehicles to help achieve those goals before we worry about different types of insurance products.
So I would say for from our standpoint our professional opinion generally speaking we want to make sure that every death benefit is covered by term insurance first until we’re able to do the following things.
We need to make sure that we’re maxing out Roth IRAs or backdoor Roth IRAs if applicable to your situation. We want to for да y deferral limit is $22 ,500 for 2023. Want to make sure that you’re funding HSAs if you’re on a health savings account, if you’re on a high deductible health plan.
Make sure that you’re contributing to your 529s if education is a goal. Make sure that your taxable investment account contributions are on track for your desired financial independence retirement age.
If all of those boxes are checked, then whole life insurance can fit into your plan for all assets protected. There are ways to access money when the market’s down, to have lifelong coverage, to add long -term care protection.
There’s a lot of benefits to whole life. I think our issue is that it’s not necessarily an issue. We don’t have an issue with whole life insurance, the product. We have an issue with where it comes in the order of operations.
Could not be better said, yeah. It should not be the first place you put money. We want to make sure financial independence is on track. We want to make sure education is on track at that school. We want to make sure all these goals are covered first.
If we think about, again, we use this half a million dollar physician family example, they’re going to be able to max all of those accounts out, and then they’re still going to be saving money. If we think about a 401k, 20 ,500, maybe you can do a mega -bactyl -eroth, do some more.
If you’re doing that, then you do the back -to -eroth. There’s 13 ,000 for you and your spouse. Then at that point, you maybe have done the HSA, maybe you’ve done 529 plans. If you’re still going to be able to save money, that’s going to go into a non -qualified investment account.
Non -qualified investment account is great because you are able to access it anytime. It’s not tied up till retirement. The downside is it’s not super tax -efficient. You’re paying capital gains, taxes on growth.
If you hold fixed income inside of that account, if you hold a government bond, a municipal bond, you avoid federal taxes. You hold a corporate bond, however. or any of the interest kicked off, you’re paying tax on.
So whole life insurance grows tax deferred. So you could, basically that is a good substitute for bonds inside of a non -qualified account for tax efficiency. However, if you’re not doing those other things and you’re not accumulating money into the non -qualified account, then it doesn’t make a lot of sense.
Actually, another funny side note at the prior place we were, I remember this advisor, this agent had recommended whole life insurance, the client bought it, and then he wanted to get rid of it because like a situ income changed or whatever.
And so the agent, like I was talking to him about it, he was like, well, remember why we did this in the first place? Like he wants safe money outside of the market. And I was like, well, this specific individual doesn’t have any money in the market.
Like he’s not funding Roth IRAs, he’s not funding a 401K. I was like, so what are we having this conversation for? I think that’s the big disconnect. that I see in this often times is that Roth IRAs can be invested in 100% equities.
It’s stuff we’re not touching for a really long time. Generally speaking, the SP500 has averaged 10% return in the last 10 years. We want to use less than 100 years. Last 100 years, 10 and a half. 10 and a half.
With dividends reinvested. With dividends reinvested. So comparing your Roth IRAs returns, your Roth 401k returns, your general investment account returns. Those are going to, generally speaking, outpace a whole life insurance contract.
So like you said, we want to make sure that they have money in retirement before we start worrying about what happens when the market goes down in retirement. While it’s an important conversation, they need to actually make sure that they have the nest egg built up first before we worry about the distribution strategy for that nest egg.
Yeah. So basically from a high level recap, a young family for risk management planning should make sure death benefit first, tax favorite accounts, all goals are on track and then we could fund a whole life.
It should not be what we’re leading with unless they have a ton of, you know, we may be sitting down at the client and they’re making a lot of money, their expense are low and we can do all of those things at one time.
That’s fine. But we want to make sure they’re able to do all those things before we would recommend that. I think that’s a pretty good overview of disability and life insurance. Ben, anything else to add?
No. I would say, again, from a risk management standpoint, there’s just a lot of products out there, even we didn’t even scratch the surface with the different types of life insurance, the business applications for life insurance, the other various life insurance products that are out there.
I think high level, the two main you’re going to see are term insurance and whole life insurance and it’s not necessarily one versus the other. It’s thinking about it in terms of what is the order about, what is most important for me and my family?
What are my goals? What do I want to accumulate towards? And then making sure that we’re prioritizing what accounts and what products can help get us there in the right order. I think that’s the most important thing to think about.
Yeah, I couldn’t agree more. Well, thanks for joining Ben. I know you’re really an expert in this space on the high -income earning young families, a lot of who you work with. So thanks for joining and stay tuned for next week’s episode.
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