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Are you taking the right amount of risk with your money? Do you know how much life insurance you need? What about disability? Liability? Policy selection requires more than looking at your budget and deciding how much you can afford. In this episode of Dentist Money™, Reese and Ryan explain how much coverage you should carry and how the amount can change during your career. They also discuss two elements of a dentist’s risk profile that aren’t covered by insurance.
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Reese Harper: Welcome to the Dentist Money™ Show, where we help dentists make smart financial decisions. I’m your host Reese Harper, here with my my trusty ol’ co-host, Sir Ryan Isaac.
Ryan Isaac: Hello! Welcome. That is what you said.
Reese Harper: Thank you for welcoming to the show again.
Ryan Isaac: Well no one welcomes you! You always welcome me.
Reese Harper: I appreciate it; now I do feel welcome. It has been another week of bumps and bruises… you wrecked on your bike once…
Ryan Isaac: No…
Reese Harper: Oh, you didn’t.
Ryan Isaac: I go really slow though, so I make sure that doesn’t happen.
Reese Harper: You rode up a hill, valiantly to the top, with never stopping, and sped there.
Ryan Isaac: Yes, I did do that.
Reese Harper: Which I think— also Q, you made that happen.
Justin (Q): I was there. Yeah, I didn’t fall, which is always a good accomplishment for me.
Ryan Isaac: Q didn’t fall this week!
Reese Harper: I have seen you take a spill or two, Q, over the years.
Ryan Isaac: It is because he goes fast, though. I mean, that is the secret. If you want to fall, go fast.
Reese Harper: For listeners who may be interested, I did see Q go over his handlebars, feet in the air, into a small pile of rocks and brush.
Ryan Isaac: There were a lot of rocks on that trail.
Reese Harper: And the next day, he woke up and played golf, and ran a little bit. Ate some hearty breakfast, and just got back on that horse (laugh).
Ryan Isaac: Well, we are talking about risk today. This is perfect!
Reese Harper: I thought that would make for a nice segway, right into our podcast episode today about risk. We almost lost Q on the hill—
Ryan Isaac: Yeah, how is your disability coverage by the way? (laughs)
Justin (Q): I will have to check on that!
Ryan Isaac: Yeah, we will go over it later.
Reese Harper: This risk podcast, I am excited about, because you and me have spend a lot of time trying to figure out how to— in financial planning, there is a topic called risk management where it mostly gets associated with insurance. People use risk management instead of using the word insurance because it sounds more sophisticated, and it makes it easier to sell.
Ryan Isaac: Yeah. We are going to talk about risk management.
Reese Harper: The first thing that we want to talk about is, when you and me were— I remember ten years ago, I was walking around the office, and you threw a bunch of papers on my desk about a client that you had met with, and we were going through it, and it was just a big pile of mess. Those listening to the podcast today, have any of you ever engaged a service provider, and you felt like you didn’t really know what was going on, but you did hire them, but it is kind of like— you are not really sure what they are doing? They just kind of live in this world of, they are supposed to help you get something done, we will call it— in marketing it happens; in consulting it happens; in financial planning it happens; in legal it happens; in tax it happens— where you hire someone, and you are kind of lost around, “what did I pay them to do, and what are they doing? What is the process I am going through?” I think risk gets lumped into insurance a lot, but risk management is topic that is bigger to me than just insurance, and we needed a way to figure out not only how to measure where people’s income is going and whether they are putting it in the right places—
Ryan Isaac: How their net worth is growing—
Reese Harper: But we wanted to figure out if people are taking too much or too little risk. And then, what categories in their life really make up the risk bucket, right? So, the first element of risk, I would like to let you introduce. What is the first main element of risk that we look at?
Ryan Isaac: Well I was going to ask, too, if this is anywhere maybe in the show notes or somewhere we could point to on the website… if you look at the block of elements, the twelve elements, this is the whole top row; there are three of them.
Reese Harper: Underneath the “Services” tab, if you go to our website at dentistadvisors.com, you will see plenty of articles and content around the Elements®, but we are going to have a whole section kind of walking you through the logic behind it, and what Ryan is referring to is in this periodic table, it answers some kind of big questions that we have as financial advisors. One is, when is someone going to be able to stop working? When is work optional for someone? Another one is, what is the right mix of assets that someone should have, and what is your mix of assets? How is your real estate and practice equity and retirement distributed? The third question is, where is your income going? Are you spending it? Are you paying taxes? Are you paying debt with it? Are you saving it? And the last question that it answers is, are you taking the right amount of risk? We kind of break that into three categories; it is the top row in our periodic table. The first element of the three on the top is:
Ryan Isaac: Risks in your investments. So, I was just having two conversations today, actually—
Reese Harper: We call it your equity rate. It is a measure of how much risk you take compared to other people in your situation, and that is what we use to kind of look at someone and say, “is this person taking on too much risk with their investment accounts, or not?”
Ryan Isaac: Yeah, I have having conversations today, two situations that described the importance of why you would want to track this. One would be, talking to a young doc with $500,000 sitting in cash in a practice that has been early in his career, young, has a lot of time ahead of him, not taking enough risk, not taking advantage of the returns that can be associated with risk early in his career. On the other hand, I was talking with another dentist today who was discussing this practice buy-in that he had recently done, and the previous doctor had drug his feet for quite a while on selling the practice, because he was going to retire, and then the stock market dropped, and then he couldn’t retire. And so, he was in a position where we was taking quite a bit of risk, so much in fact that when the stock market had dropped enough, it ruined his chances of retiring when he thought he was going to, therefore, he didn’t sell the practice when he thought he was going to, and it kind of messed some people up. So, there are two different kind of situations on the spectrum: Someone not taking enough risk, and then someone who is taking way too much for being that close to needing the money.
Reese Harper: There is a lot there in that example!
Ryan Isaac: There is a ton. Yeah, it is just fresh on my mind today; I was just barely talking about this.
Reese Harper: Yes. Investment risk… I think a lot of people don’t realize what it means to take risks in their investment accounts; I think they associate it with loss—
Ryan Isaac: That is the first question. Yeah, like, what does it even mean? That is what I would ask you. Explain to everybody what it even means and what the difference is between volatility— you know, a portfolio going up and down— versus risk. Does risk mean it can just disappear? How about we explain that for a little bit.
Reese Harper: Well, I think the more you concentrate your investment, you run the risk of loss, complete loss. The more your investment is concentrated, the more you can lose all of it. So if you take all of your money and put in into a dental practice, and you become disabled, you could lose all of your money. Like, that is a possibility. If you put your money inside of ten dental practices, you might— only if we have some kind of massive, catastrophic event, and I can think of several—
Ryan Isaac: Don’t mention earthquakes, okay?
Reese Harper: (laughs) I can think of several, Ryan has a fear of earthquakes—
Ryan Isaac: Ten practices on a fault line, and what do you know? The earthquake hits. All ten are gone.
Reese Harper: The San Jose—
Ryan Isaac: Practice chain. San Jose Dental. (laughs) it probably exists somewhere. Sorry.
Reese Harper: Yeah, sorry about that—
Ryan Isaac: San Andreas Dental?
Reese Harper: The San Andreas Dental— group. (laughs)
Ryan Isaac: It probably exists (laughs). Shoutout if it exists.
Reese Harper: Shoutout to you guys, if you are out there. That is a risk, but the more dental practices you would have, the less risk you have, right? But you do have a risk of the value of all your practices declining based on some kind of a macro trend. Maybe people decide that they want to stop going to the dentist, and they believe that their toothbrush is good enough forever (laughs). That could happen. Unlikely, but then, you would have a macro trend that would affect the global market of dentistry. The same thing would happen in the stock market, right? You have one company you invest in, you have the risk of loss, because one company can go bankrupt. If you spread your money across the entire market, meaning you owned every company in the entire market at the percentage that it existed in the market… so Apple stock gets maybe almost 2% of the market because it is the biggest company in the United States, then so on and so on, you get 3,000+ stocks, that is going to be what we call— I mean, in that scenario, is it possible for that to be worth zero? It is, it is just an inconceivable world event, right? That would mean that—
Ryan Isaac: You will have bigger problems to worry about if that happens.
Reese Harper: Yeah (laughs), there won’t be bread and food, right? And so, it is not likely what will happen. In that scenario, you have the risk of it changing price; price changes happen every day, and you will see that movement go up and down. The issue we are talking about here— we are not trying to make this be a market discussion too much today; I am trying to make this be a discussion about when you take risk in your investments, if you are properly diversified, and you have a portfolio that is being managed in the right way, you will have the risk of volatility, and you will have the risk of movement, but you will not have the risk of your money disappearing. And I think that is what people fear, strangely enough. They fear, like, if the price of this thing has gone— like, if your house drops from, let’s say it is worth $1,000,000 one day, and two years later, it is worth 800,000. I mean, that is sad, and you are bummed out about it, but do you wonder if the house is going to be worth nothing? Is that a thought you have?
Ryan Isaac: Never.
Reese Harper: No! Because there is like, some wood there, and you have some old carpet, and some dirt, and a tree. And you have some tile, and some bricks, and it feels like a structure that could never be worth zero. So you sit in it, and when the real estate market declines, you don’t go, “I have to get out of this thing before it goes to zero!” And really, the stock market is just as much a pile of bricks and mortar and dirt and trees. I mean, there are many stocks in the stock market that literally only own trees (laughs), and you own those pieces of things, and they can’t go to zero—
Ryan Isaac: Because the trees are still there (laughs).
Reese Harper: Because the trees are there, and the bricks are there, and the things are there.
Ryan Isaac: Or the potatoes…
Justin (Q): Does the market have a swing set?
Reese & Ryan Isaac: (simultaneously) yes.
Justin (Q): Okay. (laughs) I just wanted to check.
Reese Harper: There are a lot of stocks that only make swing sets, okay? I just think it is important for people to know that an investment account risk, if it is done properly, you can measure a future movement that you can expect. You can build your portfolio to where it has a precise down movement that you can kind of forecast and say—
Ryan Isaac: Or at least know what the worst case could be.
Reese Harper: And say, “this could be the worst case for me in a year.” Or, “this would be the worst two-year,” or “this would be the worst three-year period.” And that helps you kind of stay consistent as you go throughout your investing lifetime.
Ryan Isaac: Yeah, and that was kind of my point from— I mean, most people have heard the stories of somebody back in ‘07 or ‘08 that was on the brink of retirement and then couldn’t, you know? And that is just a result of being within that short window of needing the money where they or someone they were working with wasn’t considering that as an option. Like, “the way you’re invested, historically, has lost 50% in a really bad year,” or “historically has lost 30% in a really bad year. If that happened, could you still retire in 2008 like you were planning on?” If the answer is no, then you don’t have the right risk allocation in your portfolio. So the whole point of my conversations today or the way we talk with our clients is that at some point before you think— again, on the bottom row of that periodic table, we measure something called total term, which is a measure of how close someone is to being financially independent, or work optional. If you are tracking your net worth, and you know you are getting close, maybe work is optional in the next five years or so, that is a really good time to start asking yourself questions about how much volatility could I bear and still walk away from work like I am planning on. Can I lose 20? Can I lose 40? If you can’t, and your portfolio is built in a way where historically, it could be exposed to that kind of loss, then that is when you need to make changes.
Reese Harper: Yeah. And the biggest risks come when you have an investor approaching retirement, and they have a tilt towards equity or stocks that are so high that they are going to get killed at some point in the next five to seven years, lose confidence in the entire financial sector because they were taking too much risk—
Ryan Isaac: Not retire on time, not recover, because—
Reese Harper: They will bail; they will go to cash; they will sit on the sidelines forever. And then you end up having this big kind of confusion and misunderstanding about investing, and people just blaming the economy, blaming the market for not being able to retire on time. And the reality is, the markets really have been fairly consistent in the amount of volatility that they give you, and to some degree, you can kind of plan for an expected decline in a market, and you need to just be prepared for that, and a good advisor can help dial that in better. So… okay. Let’s talk about the second risk in the top row of that table. The second risk that I don’t think people would often think of—
Ryan Isaac: Yeah, I was just going to say that; it is not viewed as a risk.
Reese Harper: Yeah, it is what we call profitability rate, or the risk around your profitability. The risk around your income as it relates to your collections. I guess, why do you think it matters to understand this at all?
Ryan Isaac: Well, you were kind of alluding to this. As we were talking about protecting investments and the risk you take in different investments, your practice might be one of your biggest investments that you will ever have given the time and money that has gone into even getting to that point of being a dentist who can practice, you know? So, profitability is like the return on your practice; it is a measure of how successful the practice is, and how efficient it is working, and so measuring profitability, like you said, doesn’t really get viewed as a risk, but if your income is, you know, five percent lower than it should be for decades, then there has been a risk there that has been taken that didn’t pay off somewhere, and it is to your detriment. It is to the detriment of your net worth, and your income, and your cash flow.
Reese Harper: Yeah, you could have been taking a risk in, what? What kind of categories are you talking about?
Ryan Isaac: Well, I mean… what do you mean? Instead of—
Reese Harper: You are saying if my profitability was normalized, and I was making— let’s say an average dentist is going to try to run a 20% profit margin of their business, that would be really healthy, after they get paid 30% for their own production. And let’s say someone is at 25% profit, and someone is at 10 or 15; you have people that are at very different spectrums of profitability. Where are the different— I guess you are saying they are investing this money, hoping that they are getting a return out of it, but it might not have paid off. Do you think people actually think about it that way?
Ryan Isaac: Not really. No.
Reese Harper: They are not thinking about it that way is my assumption. It is okay to have a lower profitability if you are consciously pursuing something that is going to result in your enterprise value going up.
Ryan Isaac: Well that is what I was going to say. So, one thing I would say is, most of the time, just even in the simple calculation to measure this— all it is is just the income you are deriving from the practice divided by you collections— but in most cases, even people who have a general idea about their income, it is taken from like a personal tax return that is not a true income number. You know, there has been deductions and write-offs that have discounted what the true gross income from the business really was in the first place.
Reese Harper: Yeah, so if you are calculating this, you take your true collections and you say, “this is what I collected in a year. And then whatever I paid myself—” usually that will show up in what is called officer’s compensation, or a salary and a wage, which you will see on your tax return or on your P&L— you add that number to your net income, and that is what gives you your idea of your total income number, right? But I would say it is healthy. A lot of people don’t think about it this way, and I would rather have people think about it this way. There are wages that you get paid for work, and those should be fair market. So if in your area, doctors get paid 30%, or if in your area as an orthodontist, people get paid $2,000 a day, or they get paid 1,500 a day, or 1,200 a day, whatever the daily rate is or whatever the percentage is, those are your wages for your work. Those are not profits. Don’t think about it that way; don’t call it profitability. That is just what you are getting paid to do the work. Above and beyond that, you should have a profitability number, and if that profitability number is zero, meaning you are really only making 30%-35% of production, or you are making 1,500 a day, or whatever your number is, and that is all you are making and there is nothing left over, then there are some major problems with the enterprise. You either have too much overhead for the size you are and you need to grow your way out of it and get bigger, or you are putting money in places that are not paying off. Your costs are too high; your lease is too high; your supply costs are too high. You need to separate out wages for the work that you are doing from the profits, and then we can have an intelligent discussion about what is profitability, right? Because so many people throw, like, “I run a 60% overhead!” or “I run a 40% profit!” All these numbers kind of get thrown around, and it is sometimes confusing, and it sends the wrong message. So just make sure as you hear things around you that you are separating out the wages for work; the right amount you should be getting paid, what you would have to pay an associate to come in and do the work that was at your skill level, and then the profits that are left over.
Ryan Isaac: Yeah, so you mentioned adding up income sources from your W2 net income. There are a few other categories that we will add back in for gross income, sometimes large depreciation, amortization, or write-offs, that were expenses that reduced the income on the tax return, but weren’t real expenses. So, that was cash that you actually received.
Reese Harper: I don’t know that people actually understand what that means either. So, when I have depreciation or amortization, that means it is making it look like my income is lower, so it might show up just right next to my marketing or supply costs as an expense—
Ryan Isaac: Yeah, it is usually line 14, I think.
Reese Harper: But it is not really an expense. I didn’t really write a check, right?
Ryan Isaac: No. You didn’t pay anyone.
Reese Harper: I could have borrowed money to buy a cone beam, and I got $100,000 of depreciation. It makes my income go down on my tax return, but it really was money I had.
Ryan Isaac: Every year, you might write off 20 grand of that hundred or whatever. But you didn’t really write a check for that 20.
Reese Harper: So you are just saying, before you say what your income is, just add those things back in.
Ryan Isaac: Yeah, if you have large pension contributions from the practice, which is your business, your income, you know, maybe a lot of personal expenses your accountant is having you flow through, it is just— A. let’s find a true number for what the income really in, but B. what are the sacrifices someone could make for lower profitability, and how do you gage and judge those things? I think we could chat about that for a minute.
Reese Harper: Yeah, I think that is really healthy, because I think there are many times where it is okay to say, “look. I am just going to get paid wages for the work I am doing, but I am going to reinvest my profits in growing my company.” A single practice dentist can still reinvest his or her profits into growing their single location, and the reason they would do that is if they make those profits and they just earn them, they pay 30% or 40% in taxes on them, sometimes as much as 50%, and you are only left with half the money anyway. If you reinvest it before the year is over and incur expenses like marketing expenses to help you increase your new patient flow, or you are able to buy equipment that increases your productivity, or you are able to enhance your location by moving to a space that gives you more capacity to see more patients, or maybe invest in an associate in your location to help increase the production that you guys can do… invest in another hygienist, invest in an office manager, invest in a marketing agency or consulting company to help you figure out the right way to expand— even in one location, you can still defer some of that profitability and grow. But also, this is the way that larger businesses get built, by opening a second location, and adding associates, and adding partners to that mix of businesses, and the only way you do that is by saying, “I’m gonna have to lower my profitability for a while.”
Ryan Isaac: So, that is why there are different ranges of profitability. That is what you were saying, don’t be so general, like, “I run 40% profit, or 45% profit.” There are different ranges depending on how many locations, and depending on how many partners or associates, how many clinical days… maybe you work five days, but only two were clinical. And so, they will range completely. But the whole point is, why would we want to measure this profitability? What is important about visiting this subject once a year, whether it is the dentist or someone they hire to visit it? When tax returns are done, add up all the income sources, divide it by collections, and then just kind of analyze where profits are, and how it is trending, and how that compares to the decisions they are making in the business. Why do you want to know that?
Reese Harper: Well, the reason we take time to look at it is number one, if you don’t take time to calculate it at that moment, you don’t really know what someone’s income really is.
Ryan Isaac: At the most basic level, yeah.
Reese Harper: You don’t even know what you make!
Ryan Isaac: Yeah. So then, answering the question, “where does my money go every year into different categories?” There is no way to answer that if you don’t even know what is coming in in the first place.
Reese Harper: Yeah. Your savings, and your spending, and your taxes, and your debt, they all get spread to somewhere. The only way that you figure out whether you are making progress or not is by starting with an income number that you calculate the same every year, using the same technique, and the same line items, and the same numbers. So, it gives you a baseline of saying, “this is what I earned.” That is the first thing. I think the second thing is, depending on what you are trying to accomplish, your profitability tells you if you are being successful at that. If you are trying to expand your practice, and consequently you profitability is lower, then your collections should be going up eventually. If your collections are not going up, and your profitability is down, then something you have chosen to do is not working.
Ryan Isaac: It could be the associate, it could be the second satellite location, it could be the marketing program… it depends.
Reese Harper: Yeah. It could be the staffing that you tried to— it could be the person that you hired is just not really executing their job effectively. If your profits are lower, your collections better be growing. And that happens a lot, where people saying, “okay. My collections are growing. My profitability is maybe down a little bit—”
Justin (Q): And you guys are talking about profitability percentage in this case, right?
Reese Harper: Mhmm. That is good clarification. The percentage of would go down is what we are referring to, but in a lot of cases, for most people who are in dentistry, that will affect your dollars for a while as well. Until your collections grow a little bit, you might see that dollars and percentage go down for a while. Just because your percentage is getting a little bit lower doesn’t necessarily mean it is a bad thing. I mean, if you had three locations, and each of those locations is doing 15% profit, that is not necessarily a bad thing. One person at one location might be able to get that one location up to 25% profit margin where they are really really running an efficient location, and maybe even higher. Or someone who has three locations, because they are providing maybe better benefits to their staff, or they have more marketing, you know, the dentists are doing more production… maybe they just have a slightly lower profit percentage, but they are happy with that because at the end of the day, it is bringing in more total dollars. So in a simple thing, what does profitability tell you about risk? If your profitability is too low for too long, it is basically telling you that something you are doing is not working, you know? It is a great indicator of telling you what is not working. And I think that it is okay to defer that for a while, but you really have to take that profitability seriously, because every year that you work and you don’t claim both the wages for work that you deserve or the profits that you deserve for taking a business ownership risk, your investment is not performing, and you probably should not have started a dental practice anyway. You should let someone else run that practice and you just work for them, because at least you would be able to like, make the same wages, and not have to deal with any of the headache. And so, if it is not working, then that is a sign that you need to fix something. You know, most of us who will have ever been involved in starting a business, including me and Ryan, will look at this and go, “huh. We’re not always going to be able to have profitability be perfectly where we want it.” It is going to ebb and flow; there is going to be be periods of time where it is going to decline; it is going to have periods of time where you are going to have to invest more in order to see higher profitability down the road, or a business that is able to service more people; a practice that is able to do better. But, I just think that we want to see that profitability is being tracked and measures, and it is not being neglected, and people aren’t making excuses for why it is okay, and everything is fine.
Ryan Isaac: Yeah, when it is down.
Reese Harper: You can’t go ten years with an underperforming profitability measure unless the practice is growing. If the practice is becoming worth more… man! Like, a lot of technology companies do this; a lot of internet startups don’t have any profits for ten or twelve years—
Ryan Isaac: Amazon.
Reese Harper: But the top-line business— the collections, right, are growing like crazy. You are doing 40 or 50 million in collections, because you have 40 locations. Your profits are still not quite there, because every time you barely have any profits, you are opening another location, and continuing to grow. That is a really aggressive strategy, but some dentists who aren’t even trying to do that are running no profits and that is where it is kind of—
Ryan Isaac: So this is where organization of a balance sheet and just knowing where everything is going will pay off, because if you are tracking low profitability but you know your strategy is growth, you should be able to see it being recaptured in your net worth, and in your balance sheet, because your company is growing; it is worth more money, right? Or collection are growing. You should be able to see that trend and a corresponding low profitability.
Reese Harper: Yeah, I think that is great.
Ryan Isaac: Well, let’s go to the third one, which is the most easily associated subject when you talk about risk management, which is insurance. With our clients, we visit this subject once every year. We are talking about three main lines of insurance: we are talking about life insurance coverage, disability coverage, and liability coverage. So, what I was going to ask you first is— let’s start with life insurance. What is one of the biggest mistakes that you see people make with determining how much or what type of life insurance they should carry?
Reese Harper: Well sometimes, it is kind of like they do it like they do with getting a mortgage: they will just go to the provider of the person who is selling them something— they will go to the mortgage broker and be like, “how much of a house can I afford?” And then the mortgage broker says, “you can afford this much. That happens to be 42% of your gross income, but that is what you can afford.” So they say, “that’s my budget. I’m gonna go get a house that is in that budget range.” A lot of time, people make life insurance decisions based on one of those two things: either a budget, or how much they can qualify for. So it’s like, “what do I qualify for? How much can I get?” But it is usually budget.
Ryan Isaac: Yeah, it’s like, “what’s my mental threshold for how much I think is worth paying for life insurance? 100 bucks a month? Great. What does that get me?”
Reese Harper: Yeah, “500? That seems like a lot. What do I get for that?” And really, the American Dental Association’s life insurance plan is— like, in my opinion, there are a lot of different places to get life insurance, and some of those places have companies that have been around longer, might have stronger financial strength reputations, but almost every life insurance company in the United States is guaranteeing to pay a death benefit, and they are insured by the state in which they operate up to a certain amount. And so, the risk of a life insurance company going under is pretty low, and the American Dental Association has a contract— right now it is with Great-West— and you can get annually-renewable term insurance that just goes up every year as long as you age. It doesn’t ever get crazy expensive, but it goes up every year. And I mean, if you own it when you are— I don’t know how long it goes, until you are 70 something?
Ryan Isaac: Yeah, it is like late 60s early 70s where they won’t let you do it anymore.
Reese Harper: So at that point, it gets pretty expensive, right? But there is really no reason, in my opinion, to have less life insurance coverage than you need, because the cost is pretty inexpensive if you get it from the right sources. I am not saying this is the only place to get your life insurance, I am just saying, if you are on a budget and you are trying to cut costs but you still want to have enough coverage—
Ryan Isaac: You belong to an association that has discounted it heavily. So, take advantage of it.
Reese Harper: It is just going to fit within your budget. And so I think as a dentist, there is probably not an excuse to not have enough coverage, or the right amount of coverage. And the right amount of coverage is probably, we feel, somewhere around 30x what you spend in a year. So if you just take what you are your family spend in a year to cover all your expenses— this is super rough. We are not going to go into the exact calculation, but—
Ryan Isaac: Email me if you want to! firstname.lastname@example.org .
Reese Harper: He can help you kind of understand exact calculation, or you can listen to a couple of podcasts we have done about insurance. But that is probably enough coverage; it is probably more than enough for most people. But you can get that amount of coverage for not a lot of money, or you can go and buy any number of very expensive policies that don’t get you enough coverage. So, one mistake would be deciding to buy variable life, or whole life, or indexed life, or some other kind of life insurance that was a permanent policy, but since doing that, not being able to afford as much–
Ryan Isaac: Having like a tenth of what I actually need.
Reese Harper: Yeah, or “I have a little bit of term, but I am putting so much into this whole life that it hurts to buy more, so I thought it was enough.” And I just think there is more of an actual calculation that you should be doing here, and the point of buying life insurance is to take care of your family if you die, and you want to make sure your family is actually taken care of mathematically if something happens.
Ryan Isaac: Would you say— the people you meet on average, would you categorize them on average with regards to life insurance as underinsured, adequately, or over insured more often?
Reese Harper: More often than not, you are going to be underinsured. Then there are a few people that randomly have way too much.
Ryan Isaac: That’s so rare. You’re carrying, like, (laughs) five million more than you need.
Reese Harper: Like, four, and your are at like eleven. How did you get this much insurance? Did you tell every insurance company that you actually had this much insurance? Because usually, they won’t let this happen.
Ryan Isaac: Yeah, you are going to be killed off, man.
Reese Harper: I think another important thing to consider is making sure that you know how to buy it, who to buy it from, who to get advice from around it… we have a couple of episodes— if you listen to episode 57 and you listen to episode 25 on the show, we go into this with a lot of detail. I think that is probably enough for today, but I just think that if you want to find two quick places to get quotes from, you can go to the ADA’s website and get quotes from them there, and they are just direct, group rates. It is not the only coverage you should consider, but I am perfectly fine if someone is on a budget and they are like, “dude, things are kinda tight. I want enough coverage, but I don’t want to get it from x y z carrier, because—”
Ryan Isaac: “I don’t want to pay premium for my term life insurance. Where can I get it the cheapest?” That is a good place to start.
Reese Harper: Yeah. Or there is a website called term4sale.com where you can type in your age and get quotes from there. The reason I like the Term 4 Sale site over— there are a lot of online brokers you can get quotes from, but a lot of the online brokers only quote certain carriers, where this one will quote all the carriers. So they take the captive carries that you can’t even buy without a captive agent, they quote all of the brokered carriers… they try to bring in all the data.
Ryan Isaac: term4sale.com. If you ever want to go check your price or look at what more coverage might cost you, that is a good place to start.
Reese Harper: It is just a piece of software. It is a company that sells software to independent advisors—
Ryan Isaac: They haven’t updated the user interface for quite some time (laughs).
Reese Harper: It is pretty bad. And this is 2017?
Ryan Isaac: (laughs) it still looks the same as it did ten years ago.
Reese Harper: It may be broken by the time someone listens to this in the future.
Ryan Isaac: So here is my question: why is it important to visit your life insurance coverage every year? Why does that matter?
Reese Harper: Well as your net worth keeps growing and you get to be worth more money, the amount of life insurance you need declines. So if I say today you are worth nothing, you are worth zero, and you need 30x your spending, okay?
Ryan Isaac: Hey. You have no net worth. You are worth something.
Reese Harper: You are worth something. Just not financially, okay?
Ryan Isaac: (laughs) if you die, you are.
Reese Harper: Yeah if you die you are worth something, but…
Ryan and Reese Harper: (simultaneously) not alive.
Reese Harper: I have been that way for most of my adult life, so I am not judging you.
Ryan Isaac: Yeah, you are like the guy from It’s a Wonderful Life.
Reese Harper: So if you have that 30x your spending that I said, and you are at the point where you are worth zero financially and that is adequate, but then the next year you are at 200,000 because you have saved some money and you have grown a practice a little bit, well you need $200,000 less in life insurance. And if you don’t make those adjustments every year, you are kind of just overpaying for insurance that you didn’t need.
Ryan Isaac: Yeah, and it’s not like every year you will cut life insurance by 50 grand or something. I just had this exact conversation today with someone with a 36 total term who carries a couple million in life insurance and was like, “I can cut this now, right?” And it’s kind of like, yeah, technically on paper you could cut this. So, that is why it is important to visit every year. Or the reverse could happen. You build a building, or you start spending way more money, you know, the multiple you were spending that you were insured for has gone up, or the amount of debt you would have to pay off if something happened has now gone up, you might need more than you needed last year. So, it is something to think about every year.
Reese Harper: Yeah, and I would say that is life insurance in a nutshell. We are not going to talk about product today, but the reason we use these three types of insurances as the major measurements of risk— Ryan said it was life insurance, disability insurance, and liability coverage— is because these are the three that if something were to happen in one of these three areas, it could be like, life-changing financially. I mean the reason that as of today, 2017, we are not listing health insurance in that category as something that would be catastrophic is A. most people carry it, and by law it has certain requirements that require people to have enough lifetime benefit to where someone wouldn’t go bankrupt even with serious illness or condition. So, unlike let’s say life insurance, that is completely optional to even have, health insurance is not only—
Ryan Isaac: You car insurance, your home insurance—
Reese Harper: Your car insurance and your vehicle insurance… it is important to have adequate liability limits on those, but if the car blew up in smoke, it is only $50,000 down the drain. But if you run into someone and accidentally kill them, you have millions of dollars in liability that you could be sued for a wrongful death claim. And so, the liability side of your property is much more dangerous than the actual property damages. If your house burns down but you have a big mortgage on it, your equity went up in smoke. That is why I don’t recommend paying off your house in tiny little partial amounts (laughs). I usually recommend to either just follow the mortgage or just pay it off in full, but little partials, and leaving yourself with no money… I mean, it scares me! Someone can disagree with another day—
Ryan Isaac: An earthquake might hit. Or a fire.
Reese Harper: I just recommend, follow your mortgage until you have enough money to pay the whole thing off; it is a lot safer; it scares me less.
Ryan Isaac: Okay. That is episode 101. That’s a future—
Reese Harper: So, I don’t know how much detail— I think it is important to just say liability and disability and life insurance are the ones that are the most crucial. Now, disability insurance, without diving into the weeds on this, I think it is just important to say that it is much more complex than buying life insurance, and there are a lot of features in disability insurance that don’t make it quite as simple as, “are you dead, or not?”
Ryan Isaac: It is easier to figure out how much you need, because it is just “cover your spending,” but it is way harder to buy, because the fine print really matters; every company will define your disability differently; you can add a dozen different riders onto the policy. Some are really crucial to not miss, and others are fluff and don’t matter as much. So, it is way harder to buy.
Reese Harper: It is a lot harder to buy, and it is something that we have dedicated a lot of time to in the past on, and we will have more content on in the future.
Ryan Isaac: Yeah, same concept though with monitoring it every year. As your net worth grows, you self-insure a little bit more every year. So, your need for disability insurance, which is probably one of the more expensive policies you will pay for, it shrinks as your net worth increases, which I was going to say is the inverse, though. That is not the case with liability. And this is one of the mistakes that people make with liability insurance coverages, like their malpractice, or their personal— a lot of people don’t cover or carry personal umbrella policies. But as their net worth increases, a lot of times they don’t increase that. You know, you might have a net worth of $3,000,000, and a Per Occurrence liability policy of like 500 grand, and as that net worth climbs, it has to keep pace or you have a net worth that is not covered by insurance if you got sued. So, that is the one that is different than disability or life that the wealthier you get, the more you actually need.
Reese Harper: Yeah, it is true. The one thing I will just say about disability insurance is again, the ADA has their own product, and it is going to be much less expensive than some of the carriers that probably most of you own. At the end— the ADA’s policy, you can buy it annually renewable where it goes up over time, or you can buy other carriers the same way. The bottom line is that it is really the difference between— like, from our perspective, I would rather see someone have the right amount of coverage at a price they could afford than undercovered with a policy that is better. I don’t care if it is the best disability insurance in the world. If you spend 15,000 a month and you are insured for 7,000 a month with the best policy in the world, I would rather have you been 15,000 a month insured with a policy that was not as good—
Ryan Isaac: Yeah, it is going to require you to be really disabled to collect on that. But that is what you are buying it for!
Reese Harper: Well I am just saying that most disability policies, or all disability policies will cover you in the worst case scenario. You are a paraplegic, and you cannot use both of your arms; you can’t see; you can’t talk; you can’t hear. These are things that every policy will pay you for. Now, where it gets really dicey is these partial disabilities.
Ryan Isaac: Yeah, come back to work later, not at full capacity, not at full income, earnings—
Reese Harper: Yeah. You are hurt, but you are not out for the count; you can work in something that is not dentistry, but you can not do dentistry. I am just saying, you can get really caught up. If you come over— let’s say you are a general contractor, and you tell me about insulation in my walls, alright? There are twelve inches of space between your framing joists that you can put bad insulation in that is like that pink panther stuff that you see that is just rolled in there. Or you can put a spray-in foam in there, or you can put 40 different types of insulation and the spray-in foam plus the batting. Plus you could have it be, you know, non-toxic, or you could have it be toxic and it is cheaper. Like, if you sit in front of the insulation guy—
Ryan Isaac: It might cause a disability (laughs).
Reese Harper: If you sit in front of the insulation guy, and he explains the ten different ways that you could insulate your walls, and you let him explain them all to you, you are going to be sitting there going like, “no matter what I pick, I think I am in trouble, because I have too much information—”
Ryan Isaac: This disability really does feel like that.
Reese Harper: And I don’t know what to do now. Because if I don’t pay the maximum amount for the most expensive thing, there is a situation that will hurt me. And there are a lot of things like that in life! And all I am saying is, insurance is not free, and so we can’t afford in as much as we might want. Just like I want my house to be perfect, and my car to be perfect, and I want my vacations to be insured, and I want my iPod to be insured, and I want my fridge to be insured, you know?
Ryan Isaac: You still have an ipod? (laughs)
Reese Harper: And I want all of these things to be fixed. (laughs) I still run with my iPod.
Ryan Isaac: Okay. It’s like, huge, and strapped to your arm (laughs).
Reese Harper: So ultimately, I think at some point, you just have to say, “okay. If this is my budget, then—”
Ryan Isaac: Adequate coverage first.
Reese Harper: Adequate coverage first! And there are a lot of carrier options out there. It is not just like the ADA.
Ryan Isaac: And they are getting more competitive than they were even five years ago.
Reese Harper: So here is another thing: people want to pick level term or level disability benefits, because it feels safe. It’s like, “well if I pay for it now and lock in my cost, it will never go up on me.” But by doing that, it usually pushes the right amount of coverage outside of your budget. Sometimes now you are saying, “well I could have afforded 15,000 a month in disability, but—”
Ryan Isaac: On what they called a graded or an increasing premium.
Reese Harper: Yeah, if it was increasing every year, just a graded benefit, or graded premium… but since I want to pay for a level premium and lock in my cost, I am just going to go with nine.
Ryan Isaac: (laughs) I think I can cut. Hey, if I was hurt or sick, and I wasn’t working, I think we could cut that.
Reese Harper: If I was really hurt and I lost my income and increased my medical expenses and had to be in my home in a bed and have constant 24/7 attention medically, I could cut my expenses. No, you cannot do that!
Ryan Isaac: I am glad you are bringing that up, because you can’t say that. Okay, that is a really good point. So, adequate coverage amounts first, second is do not assume. Just like in retirement, do not assume that somehow magically, you are just going to be like, “I’m gonna chop half my spending off.” Because if you are not doing it now, you can’t do it; it is not going to happen. So don’t assume that spending will just reduce, or be gone or something. So, recap: measure and analyze, at least annually, three areas of your financial picture that are considered risk. Your investment accounts, your practice in terms of profitability income, and your insurance policies like disability and liability.
Reese Harper: That is how you manage a risk effectively! This is risk management 101 for dentists.
Ryan Isaac: And they are always changing! That is why you revisit them at least every year. They are always different, the variables and everything. Okay. Well, thanks for joining us today. We would like to invite everyone to check out our new YouTube channel, so the Dentist Money™ Show is now on YouTube. It is very cool. We are also going to be at the Greater New York Dental Meeting this November, just the weekend after thanksgiving. You can go to gnydm.com and check out the dates. We will have a booth there, the Dentist Money™ Show will be doing interviews and broadcasting from there. And if you go to our website, dentistadvisors.com and go to the top, there is a link that you can schedule an appointment to talk with us—
Reese Harper: That is the appointment bell.
Ryan Isaac: You won’t hear that on the web; maybe we will build that in.
Reese Harper: It is a C for “schedule.”
Ryan Isaac: (laughs) click it, schedule something, and we will have a free consultation about your situation, and we can answer any questions.
Reese Harper: Literally, every time someone schedules an appointment, I literally pull out this xylophone, and I hit the C with my actual wand.
Ryan Isaac: That is a liberal use of the word “literally” (laughs). Well, thanks everyone for listening and for joining us, and we will see you next time.
Reese Harper: Carry on!Investing, Insurance, Income