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The Importance of Risk Management

An expert can come in handy when it comes to insurance issues.

Veena A. Kutler and Annette F. Simon, 05/28/2009

This monthly series of articles describes the many steps and occasional missteps we have taken in building our financial advisory business, Garnet Group LLC. Currently, Garnet has eight staff members, more than 90 clients, more than $200 million in client net worth under advisement, and offices in Bethesda, Md., and Boston. Veena Kutler, CFA, and Annette Simon, CFP, are the managing principals in the Garnet office in Bethesda.

If you are anything like us, dealing with insurance issues is often the most vexing piece of the financial planning process in your practice. Insurance products are complex and confusing, some by design. Understanding them and helping clients sort through what they do and don't need can be challenging and sometimes frustrating.

Enter John Ryan, CFP, of Ryan Insurance Strategy Consultants in Greenwood Village, Colo. Ryan, a 30-plus-year veteran of the insurance industry, has been helping fee-only financial advisors analyze existing policies, determine clients' insurance needs and obtain appropriate coverage since the earliest days of the NAPFA revolution. He is licensed in all 50 states and since 1978 sells life, disability and long-term care policies as well as low-load annuities and trust-owned life insurance exclusively through advisors.

We recently interviewed him to learn more about how he works with advisors, the changes he has seen in the industry over the years, and what he sees in the future.

Garnet: John, tell us a little about your background and how you got your start?

Ryan: I grew up in Boston, where my dad was a cop. I attended Holy Cross College on a baseball scholarship. I hoped to find a job as a teacher/coach, but those positions were tough to come by. So in 1978 I took a job as a group disability representative working for Union Mutual Insurance Company in Portland, Maine. (Union Mutual later became UNUM).

I was given a choice between relocating to Atlanta or Denver. I chose Denver and have been there ever since. Initially I specialized only in disability insurance, selling primarily to physicians and dentists; later I branched out to life and long-term care products.

Around 1982 I met Jim Schwartz, a Denver advisor who was one of the founders of NAPFA. Through Jim I met other fee-only advisors and recognized that there was a growing pool of advisors who didn't sell insurance products and were looking for an agent they could trust to help them meet their clients' insurance needs. My business began to grow rapidly by word of mouth and I soon reduced my local marketing and focused my consulting efforts on serving NAPFA members and their clients.

When I started out it was just me and a telephone. Today there are five of us in the office and we all wear multiple hats. Thanks to our 800 number and our website we're able to service clients across the country. Seventy-five percent of my revenues now come from the fee-only advisor business; the remainder is from Colorado-based clients.

Garnet: What are the biggest changes you've seen in the industry over the years?

Ryan: One significant change has been the sharp decline in the number of companies offering quality disability coverage. When I started my career there were more than 50 providers in this arena; today there are only about 10. As a result it's become more and more difficult for consumers to obtain disability coverage that really meets their needs.

Another big difference between today and 1978 is the proliferation of long-term care insurance. Back then, the public was completely unaware of long-term care. Long term care is basically disability insurance for retirees. Policies feature similar terminology and parameters as disability income policies--waiting periods, monthly benefits, benefit periods, definitions of disability, etc. For consumers it was a new and foreign concept. I credit the government and the media with doing a good job of educating consumers about the limitations of social programs like Medicare and Medicaid and the need for private insurance. Many state governments have been very active in promoting long-term care insurance since about 2000, and since then our long-term care applications have doubled from year to year.

Even today only about 10% of those making long-term-care claims have private insurance. Most claims are still paid by Medicaid; with a smaller number covered by Medicare.

On the life insurance front, the Internet has had a very big impact on pricing and profitability. Back when insurance was primarily sold face-to-face, it was difficult for an agent to make much money on a term life insurance sale. The availability of online life insurance quotes since 1985, though it has diverted some business from agents and driven down premiums, has enhanced consumer awareness of the value of term insurance and dramatically reduced the cost and difficulty of selling it for agents. A business like mine would not even have been possible without this innovation.

A final big change has been the introduction of guaranteed universal life products. These plans are usually purchased to fund life insurance trusts for estate planning purposes and have better guarantees and lower premiums than traditional whole life products.

Garnet: How do you typically work with an advisor?

Ryan: It's really pretty straightforward. The advisor contacts me and provides me with basic client information and tells me what kind of coverage he or she thinks the client needs. I ask for permission to speak to the client directly so that I can obtain more detailed information, including medical history that the advisor typically does not need or want to know. In more recent years my Web site has streamlined this process even further. The site allows either the advisor or the client to fill in detailed application information for life, disability and long-term care proposals.

Following this data-gathering step I'll research the product universe and come back to the advisor with my top three recommendations. Usually we'll talk and I'll tell the advisor which of the three I feel is the best choice for the client and why. I'm always available to speak directly to the client and answer any questions.

Once the client decides to purchase, we take them through the complete application process and schedule the physical exams. Once approved, we send the original policy to the client and a copy to the advisor and follow up annually with renewal reminders. We never market to or recommend additional products to our advisors' clients without prior approval from the advisor.

I also encourage advisors to send me any existing policies their clients hold--so we can analyze and assess those current policies. In some cases keeping the existing coverage makes sense. When it does not, we'll suggest alternatives and provide support in the process of implementing any changes.

Garnet: What are some of the biggest mistakes you see advisors make?

Ryan: I think many advisors play it too close and don't recommend enough life insurance for their clients. Term insurance is so inexpensive it really makes sense to gross up on coverage and to account for the unexpected--like the 2008-2009 market crash, for example. You can always start with a larger policy and reduce the coverage in later years as the client builds his/her portfolio to cover projected cash flow needs.

When it comes to disability insurance, some clients don't purchase what they need--primarily because of price. I'd like to see advisors doing a better job of framing the value proposition in a way that encourages clients to act in their own best interests.

Garnet: Can you give us an example?

Ryan: One of the best is the Job A/Job B analogy. Imagine you are choosing between two jobs--Job A pays you $10,000 a month, unless you get sick or injured and then it pays $0. Job B pays you $9,800 a month if you are healthy and $5,000 a month if you are sick or hurt. The $200/month is used to purchase an individual policy or a combination of individual and group plans. This is a powerful illustration of how spending a relatively small amount on disability insurance dramatically reduces a family's risk of losing income.

Another good way to deliver the value message is to add up what the client spends on property and casualty coverage to protect all of the stuff he/she owns. Protecting the family's income is surely worth at least as much as covering all of these things.

Garnet: What do you see ahead for the industry?

Ryan: History is already starting to repeat itself in the long-term care marketplace. As we have seen with disability providers, the long-term care universe will shrink and consolidate. There are currently about 100 companies writing policies, but 90% of the business is done by the top ten carriers. Therefore I think there will be 10 - 15 companies offering quality LTCI in 2015.

Disability carriers cannot adjust rates and many are locked into some very generous policies that were written in the 70's and 80's. As long term care products were being developed the insurance companies took a few lessons from the disability world and secured the right to adjust premiums if the change is necessitated by their claims experience. Only time will tell how this all shakes out - long term care is a very specialized risk and there aren't yet enough claim statistics available to draw strong conclusions, especially in the realm of home-based care and assisted living.

Veena A. Kutler, MBA, CFA, and Annette F. Simon, MBA, CFP, are founders and principals of Garnet Group, LLC -- www.garnetgroup.com, a fee-only wealth management firm with offices in Bethesda, MD and Boston MA. Both are NAPFA Registered Financial Advisors with more than 30 years of financial planning and portfolio management experience between them. Garnet serves the needs of high net worth individuals and families in the Boston and Washington, D.C. areas

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