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Risk Management Thomas E. Nolan, MD, MBA Abe Mickal Professor and Chair of Obstetrics and Gynecology Director, Women’s and Newborn Services LSU-Health Science Center New Orleans
Objectives • The following should be covered by at the end of these lectures: – Professional relationships: who you are and who you need and when – The budgeting process and tools used by financial planners – Business entities and how to chose – Understanding risk management and appropriate use of insurances
Stereotypical Behavior • Most financial planners will have a preset idea of where people are from a financial and emotional basis – Important to understand where you as a physician stand what the planner expects from you – Self realization of how you were raised, what is of value to you needs to be formulated and articulated, including your financial fears
Characteristics of Physicians (as seen by themselves) • • • Intelligent Compassionate Sophisticated “Captain of their own ship” Overworked, under appreciated Under compensated
Characteristics of Physicians (as seen by most financial advisors and sales personal) • “You can sell a doctor anything” • The more you pay, the better it is • Because we make more, we should buy better things and pay more • Rely on “feelings” about financial planning situations • “Deserve” better treatment
Characteristics of Physicians (as seen by most financial advisors) • Don’t understand short and long term strategies of financial planning • Tax avoidance schemes (every doctor pays too much in taxes, just ask!) • Tendency to rely on one advisor financial advice (CPA, stockbroker, insurance agent) • “Just too busy”
Our Goal is to Teach you: • Fundamental understanding of financial services available and how to use those services • How to reach YOUR GOALS • Goals and guidelines for evaluation of your progress at different stages of your biological and financial life
Steps used by Financial Planners • Define goals in terms of dollar amounts and time frames • Determine existing resources • Determine if additional resources are needed • Consider potential strategies/ products for achieving goals
Before you see: CPA, Planner Attorney • What do you want to accomplish • Call in advance: find out what they want or need prior to appointment • The billing clock is usually ticking • The more you bring in, the better the visit, the less costly • Letter of intention (will, estate, etc. )
Before you see: CPA, Planner Attorney • Worksheets are helpful (Excel, Quicken, etc. ) • Vanguard has financial planner worksheets (17 pages) • Requires probably 8 -10 hours of work and worth every minute
Creating Time Lines • Next series of slides is meant to stimulate thought and are less than perfect, but are tend to be major worries to most professionals • The time lines may be off by a decade, but are only meant to illustrative
Financial Age: Young • 25 – 29 – Education – Creating education debt – Marriage, relationships – Children • 30 - 34 – Finishing residency – Beginning to manage education debt – Establish, join practice – First cars, houses – Insurances
Financial Age: Young • 35 - 39 – Liquidating education debt, consolidation of debt – Infertility treatments or adoption expense – Children's education needs – Insurance needs • 35 - 39 – Home, furnishing upgrades – Retirement planning – College planning – Tax problems
Financial Age: Enter Early Middle Age • 40 – 44 – Practice growing, expanding – Children’s secondary education – Retirement planning focus – College saving • 40 – 44 – – Divorce Asset accumulation Estate planning Income taxes
Financial Age: Middle Age • 45 – 49 – Practice leveling off – Leveraging practice – Retirement planning – College !! – Debt decreasing (home, boat, etc. ) • 45 – 49 – Buying out senior partner or adding partners – Insurance needs lower – Estate planning
Financial Age: Later Middle Age • 50 – 54 – Retirement planning – Asset accumulation – College – Divorce – Other business opportunities • 50 – 54 – Buying out senior partner or adding partners – Second home, bigger boat – Estate planning
Financial Age: Later Middle Age (Getting Close!) • 55 – 59 – Retirement planning – Estate Planning – Asset accumulation – Consider selling practice, ? Relocation ? – Taxes
Early Elderly • 60 – 65 – Retirement planning, assessing income needs, medical needs, children’s needs – Selling practice – Reevaluate estate planning – Life insurance, medical insurance – Tax planning
You Made it!!! • 65 and beyond – Keeping busy!!! – Retirement planning, cash flows, vehicles to reach needs – Social Security, Medicare, Long term care – Estate planning, with a close eye on taxes!
How do I get there? ? ? • Need to establish a team of professionals or a “quarterback” to assist you • Most financial individuals come with strengths, weakness and bias • Major areas of concern need to be addressed in interviews and articulated
Common Problems or L. I. V. E. S • • • L – Lack of liquidity I – Inadequate resources I – Inflation I – Improper disposition of assets V – Value or proper financial security E – Excessive taxes (poor investment choices) • S – Special situations
Your Team • Accountant: CPA and look for area of expertise. Personal, business and estate are your primary focus • Forget H & R Block—you taxation needs as you acquire assets and increase income will outstrip most the training and knowledge of standard preparers
Your Team • Lawyer. Knowledgeable in areas such as: – Contracts – Shielding assets – Estate planning, trusts – Impact of divorce • Comfort level should be the same as your pastor, rabbi or priest!
Your Team • Broker or mutual fund company – More individuals are working with online mutual fund companies – Banks, brokers and mutual fund companies are becoming more of a one stop shopping • Banker – Trust officer, lending officer, etc.
Your Team • Insurances: – Life and health agent – Disability – Casualty agent – Car – Umbrella – Assessment of needs
Your Team • Financial Planner (fee only) – Assess your needs – Coordinates other team members to focus on your needs – Assess where you are, where you should be, where you want to go • Avoid the one for all (typically insurance sales people)
Steps used by Financial Planners • Consider client constraints affecting selection of vehicles and strategies • Select appropriate vehicles and strategies • Implement plan • Monitor and adherence to plan • Revise plan as client situation changes
Data Needed • Family and dependant data – Date of birth, Social Security number, health problems, extended family members as appropriate – Desires of family and how that may affect planning • Parents • Children and education (public, private graduate school, etc. )
Financial Work Sheets • Family Balance Sheet (“Net worth”) • Income statement: What comes in and how it is spent on a personal level (think monthly budget) • Statement of Cash Flows (Where it comes from and where it goes from a more global level)
Financial Work Sheets • Family Balance Sheet – “Snap shot” of where you are on a particular day – Commonly called “net worth statement” – Static: reflects one point in time, but gives an overall quick assessment of where your assets are located
How to Construct a Balance Sheet • List all assets first starting with most solvent and working to fixed (house) – Cash, Money Markets, Annuities and fixed income securities (bonds) – Stocks, mutual funds, cash value insurance policies – Collectables, art, jewelry, guns, etc. – Real estate, home, vacation home, boats, autos, furniture
How to Construct a Balance Sheet • Then construct a sheet of liabilities – Mortgage, second mortgage – Business debt – Auto loans – Consumer debt (credit cards) – Loans or ongoing payments (alimony) • Subtract liabilities from assets = net worth on that date
Balance Sheet • Assets – Cash – Short term and liquid investments – Long term, deferred retirement plans – Jewelry, coin, art – House, cars, boats • Use FMV • Liabilities – – Credit card debt Unsecured debt Car loan Mortgage • Subtract liabilities from assets = Net worth (positive I hope)
Family Income Statement • Usually on a monthly basis: – Put all revenue sources at beginning of month – Subtract recurring debts (mortgage, car and education loans, insurance payments, tuition – Subtract utilities, cable, telephone, estimated usual food, entertainment – Net at bottom is discretionary income (or possible investment moneys)
Family Income Statement • Helpful to monitor sources of spending and will allow for more accurate budgeting • In many cases, will uncover expenses that can be modified or changed to better invest for wealth creation
Family Cash Flow • Best use of many financial tools (Quicken, Microsoft Money) that you put payments and transactions into program • Gives perspective of sources of income, expenditures, savings, investments • Also very useful to better understand where monies are moving and role of taxation, retirement, etc.
Other Data • Investment data – Accounts, rate of return, ease of use – How safe you feel – Risk tolerance – Why you have chosen the vehicles currently using – Do you want to change?
Other Data • Insurance policies should be reviewed on an annual basis • Wills and power of attorney • Estate planning – Child or parent care – Immediate liquidity? – Where is the necessary information? – What do you plan to do?
Other Data • • • Age of retirement Goals in retirement (travel, hobbies) Income sources How much do you think you will need Where are you going to live Health and long term insurance
Budgeting • Not only to “save money”, but to better see how money is used • Must be flexible • Many financial software programs are available today (Quicken, Microsoft Money and others) • Serves as a monitor of fund usage
Budgeting • Goals of budgeting – Controlling expenses – Accomplish desired level of wealth • Retirement • Children’s education • Vacation or second homes – Monitor performance of investments
Risk Management • Wills and Power of Attorney – Single most important document in the fate of your estate (you lose control of how your assets will be distributed) – Power of attorney—especially important if you become incapacitated physically or mentally. Should be drafted with will and is minimal cost
Wills need to be reviewed: • Birth of a child or grandchild • Death of spouse, another beneficiary, your executor, your children’s guardian • Marriage or divorce in nuclear family • Move to a different state • New practice
Wills need to be reviewed: • Substantial increase or decrease in your estate • Real estate acquired in another state • Retirement • Change in tax law (currently major changes in unified credit laws, e. g. how much can be transferred to heirs tax free)
Estate Planning • Adequate insurance early in career to provide for spouse and children • Insurance on spouse if primary household provider or income • Later in career, marshalling your assets for retirement, and disposition of estate after death (tax strategies)
Risk Management Unexpected Event Attendant Risk Liquidity crisis (debt Forced sale of crisis, tax assessment assets, bankruptcy Death Disability Loss of earnings, tax liability, liquidity crisis
Risk Management Unexpected Event Sickness Attendant Risk Medical expenses, family earnings Property loss Loss of assets and asset value Personal liability claim Legal cost, judgment or settlement
Principals of Risk Management • • • Risk Reduction Risk Avoidance Risk Retention (self-insurance) Risk Transfer Risk Sharing
Risk Management • Risk avoidance — least practical, but certain behaviors can be modified. Hobbies that place hands in danger • Risk reduction – anticipating problems, office procedure and back ups for important documents, notification of abnormal results
Risk Management • Risk transfer – Insurances and indemnification obligations • Risk sharing – Combination of retention and risk transfer
Risk Management • Risk retention: deductibles—in most cases take the highest. Disability insurance consider 60 -90 days (sick days and vacation days should be considered in calculation) • Chance of becoming disabled much greater than death
Morbidity (Disability) versus Mortality (Death) per 1000 lives
Disability Insurance • Greater use by physicians over the past decade because of decreased satisfaction with practice of medicine • Benefits vary between policies – Maximum is usually 60 -80% of income – Benefits may decrease with time or age
Disability Insurance • Definitions (and in disability insurance it is all in the definitions!!): – Occupation specific (difficult to obtain in past 5 years, but best if found/ afford) – May change after 2 -5 years to any occupation (PCP provider) – Residual or partial disability coverage may be important considerations
Disability Insurance • Key Issues: – How is the disability defined, i. e. , is it own occupation, modified occupation (defined as any reasonable occupation based upon education, experience or training) or any medical occupation – Elimination period: how long do you have to wait to collect usually 30, 60 and 90 intervals
Disability Insurance • How much will it pay? • How long will it pay – Many policies are until age 65 • Will it pay for additional training in another specialty? • How often are physical reassessments?
Disability Insurance • Company history and rating – Recent article in NY Times, February 13, 2005 on difficulties with Unum. Provident with 200, 000 disputed claims – Women are more likely to be disability than men because of OB/GYN related issues • Once you begin to collect the company will be vigilant that you remain disabled, i. e. , hire private investigators, etc.
Life Insurance • Major Variations (regardless of how the insurance community presents it) – Term insurance (“pure risk”) is for death. Cheap and provides what you and your family really need – Whole life, variable life, universal life, etc. Death benefit with a savings vehicle
Life Insurance • Term insurance can be bought in varying increments: until age 65 -70, or in varying lengths 5 -30 years • May require a physical. At the end of a term, another physical may be needed and may change risk status • Premiums vary by age and type • Consider policy to age 65
Life Insurance • Whole life: level premium until age 95— then face amount returned • Expensive. May borrow against cash value of policy but decreases death premium by the borrowed amount (why borrow your money and assume the risk? ) • Agents love whole life—they get 40 -150% of first 1 -2 years of premium
Life Insurance • Major difference in whole life versus variable – Whole life is “owned” by the company and invests in very conservative vehicles such as real estate and bonds – Variable has 2 accounts: term on one side and the variable is linked to the vehicle you choose
Life Insurance • Variable life (or any product with variable in the name). Term life with another separate account—may be money market, equity or bonds • Universal life: decreasing term with increasing cash value—some policies allow contribution changes
Life Insurance • What it is good for: – Protecting against catastrophic events – May be used in estates planning (trusts, pay estate taxes) • What it is not good for: – Saving vehicle (poor return, inflation risk) – Borrowing—make banks assume risk, not you.
Life Insurance • Later in practice, consider key person insurance – 2 or 3 partners own a building—key person insurance would buy out the dead partner’s interest and allow the remaining partners to keep the building – Also can be used for liquidity during shifting practice patterns
Insurance Needs • Insurance is a wedge: you need a lot in the beginning when assets are low and decreasing amount with increasing assets • “Usual” ratio of insurance to income is 5 -6 times pre-tax income
Other Considerations • Replace care given by spouse • Replace income generated by spouse • Transition cost if spouse dies (time off, reconsiderations of work commitments, etc. ) • Children's education costs, etc
Insurance Trusts • If you are the owner of a life insurance policy, unless a trust is established, the death benefit may be included in you estate (for tax purposes) • Become more important as estate size increases (consider if > 1 million)