The Millennial Guide To Managing Risk With Insurance

Originally in Forbes“I’m too [fill in the blank] to worry about insurance.” If you’re a millennial, there are plenty of words you could choose from to complete that sentence. Perhaps “young,” “poor,” “busy” and “skeptical” are good ones (for starters).

You might have enough insurance.  You might even have too much.  But I’d bet you don’t have as much as you need in some categories, too.  Regardless, ignorance is neither blissful nor beneficial at any age, so let’s ask and answer the questions below, reviewing the most prominent types of insurance that may—or may not—be important for you to consider.

First, allow me to offer a fundamental insurance lesson that will serve you well now and into the future: Don’t just buy insurance. Instead, manage risk.

I offer the following Risk Management Guide as a template for making insurance decisions in my book, Simple Money:

Risk Management Guide

Long-Term Disability Income and Long-Term Care Insurance Apps

In order to help you navigate the two most complex forms of personal insurance, I’ve created two “apps”–in the form of Excel spreadsheets–that you can use to create a plan, analyze any policies you have and obtain apples-to-apples quotes for new policies, if needed.  You can find the backdrop for the disability income exercise HERE and the long-term care exercise HERE, or just jump right in with the instructions given below:

Screenshot 2017-03-08 11.52.30These exercises are each a three-step process.  Step One is to determine what you need.  This is accomplished by writing out a Disability Plan if you are in your 30s, 40s or 50s.  If in your 50s, 60s, or beyond, you need to articulate your Long-Term Care Plan.  Not everyone needs insurance, but everyone needs a plan.  Start the process by writing out a paragraph beginning with the following sentence: “If I became disabled [suffered a long-term health care incident], here’s how I would handle that financially…”

Step Two is to understand any coverage that you already have.  The online exercise includes a template with spaces to fill in for the primary features mentioned in this two-part blog series.  Once you have completed the template, you’ll better understand the coverage you have.  Step Three is to determine what you actually need and want in a policy and create a template to retrieve quotes and find the best coverage.  You’ll be better prepared for the engagement with the insurance agents because your template will ensure you’re comparing apples-to-apples, a very difficult thing to do with long-term disability income insurance and long-term care insurance.

Click HERE to access the long-term disability income app and HERE to access the long-term care app!

Home and Auto Insurance App

This is the seventh exercise in a series designed to walk you through an entire financial plan.  The exercise is embedded in an Excel spreadsheet you can download and save for personal use.  You can find the backdrop for the exercise HERE or just jump right in with the instructions given below:

In order to know if your home and auto insurance policies are providing you with the appropriate levels of coverage, you’ll want to collect the declaration pages for all of your home, auto, condo, and renter policies.  The Application Exercise online will provide a chart to fill in your various coverage limits next to our recommended minimum limits.

After you’ve tailored your desired limits with the help of an independent planner who does not accept commissions or referral fees for the sale of insurance, you can use the Application Exercise to shop your coverage with several carriers.

Click HERE to access the app!

Risk Management Matrix App

This is the fifth exercise in a series designed to walk you through an entire financial plan.  The exercise is embedded in an Excel spreadsheet you can download and save for personal use.  You can find the backdrop for the exercise HERE or just jump right in with the instructions given below:

The best way to see activities through a risk management lens is to go through some ideas of your own, like the example of my car accident, and discuss or jot down the ways in which that risk could have been managed with each of the four methods.  It doesn’t have to be something as dramatic or painful.  It could easily be a risk management success story that you can now better understand.

Examine both the personal and the financial risk using all four of the risk management techniques.  After doing that exercise, discipline yourself to analyze a few other examples throughout the course of your days.  If you’re bold enough, teach the technique to a friend or family member (there’s no better way to learn something than to teach it).  Eventually, it won’t be work, and you’ll see your options more clearly.  Then, when you examine your existing insurance products or new offerings, look for ways you can reasonably avoid, reduce, or assume the risk before paying someone else to do it for you.

Click HERE to access the app!


Over the weekend, I was watching a television program on which a financial advisor made his claim that, “The market has always come back and I think it always will.”  Sadly, this has been the sales pitch of stock brokers for generations and only some of those generations have walked away with a positive rate of return.  For this post, I’d like to share with you the open to the fifteenth chapter of The Financial Crossroads titled “Risk Management Investing."  We call into question the now institutionalized thought in the financial industry of “Buy and Hold,” Asset Allocation and Modern Portfolio Theory to remind all of us of the mathematical truth that IT’S EASIER TO LOSE MONEY THAN IT IS TO MAKE IT! 

From “Risk Management Investing”:

"I am more concerned about the return of my money than the return on my money." (Mark Twain)

Mark Twain was the first to wittily claim that he was more concerned with capital preservation (the return of my money) than growth (the return on my money), but it is interesting to note that Twain passed away in 1910, prior to the Great Depression.  Oklahoma’s favorite son, Will Rogers (who died in 1935), also later made this a notable quote.  I have another that I’d like you to chew on.  “It is easier to lose money than it is to make it!”  

That’s not a catchy slogan or tagline.  It’s a mathematical fact.  If you have $100 and you lose 10% of it, it will take an 11% rate of return to become whole.  If you lose 20%, you’ll need to make 25% to get your money back.  What if you lose 50%?  What rate of return would you need to make your money back?  The answer is an astonishing 100%!  I’m not being “tricksy” as Tolkein’s character, Gollum, called the Hobbits in the Lord of the Rings trilogy.  See for yourself:

  • $100 x 90% = $90; $90 x (100% + 11%) = $100
  • $100 x 80% = $80; $80 x (100% + 25%) = $100
  • $100 x 50% = $50; $50 x (100% + 100%) = $100

Once you’re down 50% and facing that big 100% hill, it will take you around seven years, if you’re able to make an annualized rate of 10% per year, to get back where you started.  If you’re making closer to 7% each year, you’ll be waiting a full decade to break even.  If you earn 4% on your money, it will take you 18 years to recover from a 50% fall.

But you say, “I always learned that you need to buy and hold.   The market will go up and down, and we can’t time it, so we shouldn’t try!  It’s not timing the market.  It’s time in the market!”  It is true that market timing is a very dangerous business——betting, if you will.  However, if and when you’re able to see the bearish train coming down the tracks, would it not make sense to get out of its way?  The price of staying in can be disastrous.  From the day the market peaked on September 7, 1929, it would have taken until 1954 to break even if you bought, and held.  That is a pretty long time to wait, especially if you were planning to retire in 1932.

And today?  For the last decade, the market is down over 20%.  You will find that the current logic that runs the financial services realm at the institutional level was developed in one of the best stretches the market’s ever seen.  From 1982 until March of 2000, the market ran upwards with little impedance.  Objectively speaking, Buy-and-Hold and strict Asset Allocation concepts, born in that 18-year stretch, worked very well.  But what about the stretch from 1964 up until 1982?  Believe it or not, that span represented yet another 18-year stretch where the buy-and-holder would’ve made nothing——zip, zilch, nada.  And we in the United States have it good!  Japan’s staring at their 20th year of an atrocious run that leaves the Nikkei still 70% south of its peak at 40,000.  So, eight years into a rough losing streak for the U.S. market——and following a colossal financial demise brought on largely by ignorance and greed on the part of the U.S. government, corporations, and citizens——would you rather be buying-and-holding the Dow or the Nikkei?

It’s not my intent to scare you, so let’s go back, and I can try to give you some answers and some hope.  The world’s best investors are not buy-and-holders, asset allocators, or Modern Portfolio theorists.  They’re risk managers.  These are folks like Sir John Templeton, Jean-Marie Eveillard, Jim Rogers and yes, Warren Buffett.  They spend more time worrying about how not to lose money than they do trying to make it.  I’m not talking about leaving all your money in T-Bills and CDs.  I’m talking about resetting your brain to focus first on managing risk in your investments, then, on your return.