Financial Planning Basics – Risk Management
By Nathan Brooks
Building a financial plan is like building a house – you start with the foundation, not the 2nd floor. Over the course of the year, we’ll be covering some basics of financial planning. These items aren’t exciting, but they need to be in place if you want to have a stable platform to build from. Our first major area is called “Risk Management” – or in other words how to “cover your arse” if something goes wrong.
1. Disability Insurance
In 2015 I received a call from an OBGYN client that I met while she was in Residency in Chicago. “Hi Nate, do you have a minute?” I sensed some anxiety in her voice, “Yes, of course. What’s up?” I said. “Well, um… I wanted to call you because I was just diagnosed with MS…and it is severe enough already that I am probably going to have to take some time off work. Am I covered for something like this?”
I have personally received a few of these calls, and as a firm we have had this conversation dozens of times with clients. My stomach always drops, knowing that someone I care about has just had their life significantly altered. 1 in 4 Americans will be disabled for at least a year before reaching retirement age. Read that again. You are far more likely to be disabled than you are to die before retirement. For physicians, think about the mortgage you have taken out on your brain (student loans), and the time you have spent training that could have been spent making money and saving for retirement in another career. If tomorrow you woke up and could no longer do your specialty, would you be in trouble financially? If the answer is “Yes,” then you need disability insurance.
It is important to go with a company that offers true “own occupation” coverage, meaning you receive the full benefit if you cannot do your specialty – even if you can earn an income doing something else. There are only 6 companies that offer this kind of coverage so make sure to read the actual definition of disability. It also helps to obtain coverage through an independent advisor rather than an insurance agent so you can shop out the best policy for you depending on your age, sex, and specialty. We can also help you lock in small, inexpensive policies while you are young and healthy and increase them later without medical underwriting again.
2. Life Insurance
Life insurance is a little simpler. If you are married, and/or have any children then you need life insurance. The best option right now is some inexpensive term coverage. You can obtain another policy once you go into practice that will meet your long-term needs. Do not listen to anyone trying to sell you whole life insurance.
3. Home, Auto and Umbrella Insurance
Just last week I had a client in Florida call me, very bewildered, and say they had been in an accident that was their fault. No one was hurt, but they were sure a lawsuit was on the way. We’ll see if this materializes, but if it does, they are prepared. Doctors are perceived to have deep pockets and are sued more than average. A simple $1,000,000 umbrella policy will cover you in incidents like these, and costs about $200 per year, so it is well worth it.
While you are just starting out, you don’t need much outside of these insurances. Having these items in place ensures that your financial plan is not derailed by something you didn’t see coming.