Navigating the Landscape of Risk Management

01:07 Why is protection an integral component of wealth building?

Patrick Donohoe: Reflecting on my journey, 2008 to 2010 was an incredibly tough period for me. I was on the brink of going out of business. My wife even suggested I get a job at 7-Eleven, and we considered relocating to Arizona. A lot of this was due to my own mistakes. I made poor business decisions, largely because I was inexperienced. Fast forward to 2016, I made more business errors. Our company grew rapidly, but I wasn’t prepared as a leader. As a result, I had to let go of 20 to 25 employees within a year. However, 2016 was easier to navigate than 2008-2010 because I had learned valuable lessons. I had a better grasp on financial statements, hiring, and management. I also had business coaches guiding me. If I had faced the 2016 challenges in 2008, I would’ve probably gone bankrupt.

The reason I share these stories is to highlight the importance of protection in personal finance. We live in a society where lawsuits are common, but protection goes beyond that. Life is unpredictable, especially in business. Many view insurance as a necessary evil and often opt for minimal coverage. But based on our experience with thousands of clients, it’s clear that protection is crucial. Disruptive events, whether they’re lawsuits, divorces, medical emergencies, or market fluctuations, can devastate one’s wealth. The Perpetual Wealth Strategy aims to create a high-quality life by strategically protecting against these inevitable disruptions.

Wade Reed: Absolutely, Patrick. I’ve seen the impact of such disruptions firsthand. Some of my clients have faced natural disasters like Tropical Storm Sandy and Hurricane Katrina. One client, affected by a recent hurricane in Florida, expressed his relief at having proper insurance in place. He said, “Wade, if I hadn’t taken your advice on insurance, I would’ve been panicking. But now, I have peace of mind.”

Patrick Donohoe: I once shared that mindset, not fully understanding the power of leveraging insurance to safeguard my business and personal finances. But witnessing disruptions in clients’ lives changed my perspective. One client, who recently sold his business for a significant sum, taught me about directors and officers insurance. He ran a medical supply company that faced a crisis when a sales force began falsifying Medicare claims. The FBI intervened, but thanks to their insurance, they covered all legal expenses, saving the business. Many businesses are unaware of the risks they face, from intellectual property violations to employee lawsuits. In our wealth strategy, protecting accumulated wealth is as crucial as the accumulation itself. After all, how many disruptive events does it take to derail one’s wealth accumulation journey?

08:00 How does risk management increase your growth opportunities?

Wade Reed: Just one unexpected event can have significant financial implications. Take a recent experience of mine as an example. About a week ago, I was in a parking lot. I looked right, saw no cars, and proceeded. Out of nowhere, another car collided with mine. The damages amounted to nearly $15,000 between both vehicles. Thankfully, due to my insurance, I’m only out a thousand dollars. It’s a disruption, but the peace of mind my insurance provides is invaluable. Instead of setting aside large sums for self-insurance, I can use my money for my family and investments.

Patrick Donohoe: It’s interesting how insurance is often viewed as a “necessary evil.” But when you really think about it, insurance can be optimized to provide even more protection with less out-of-pocket expense.

Wade Reed: Absolutely. We’re spoiled in the U.S. with the variety of insurance products available, and we often take them for granted. I recently heard a podcast about a study in Africa. Researchers observed tribal farmers who diversified their assets due to fear of unpredictable weather. One group was given cash reserves, while another was provided with an insurance product. The group with insurance was more willing to invest and grow because they had broader protection than just the finite cash.

Patrick Donohoe: So, the group with insurance felt more secure because they weren’t absorbing the risk themselves.

Wade Reed: Precisely. The insurance provided a greater sense of certainty. This study highlighted the importance of risk management and mitigation. In the past, risk management was a dedicated profession. People would hire experts to evaluate risks and provide appropriate protections. Today, this seems like a lost art. We represent life insurance companies and offer various protection services. But there’s more to it, like auto, home, and business liabilities. Protection is essential for growth. Think of it as the foundation of a house or the braking system in a car. It’s what gives us confidence.

Patrick Donohoe: A great analogy is comparing protection to the root system of a tree. While the trunk, branches, and leaves are visible and provide shade, it’s the roots that determine the tree’s survival during storms. Depending on one’s situation, different risks need to be mitigated. Whether you’re a business owner or an individual, understanding and addressing these risks is crucial.

14:36 What is income and asset protection?

Patrick Donohoe: When we talk about risk in personal finance, we’re essentially looking at two main areas: asset protection and income protection. Consider scenarios where you might be liable, like someone getting injured on your property or a car accident. While property and casualty insurance can cover damages, the real risk often lies in the potential harm to the person involved. If you unintentionally harm someone, especially if they’re a high earner like a doctor or lawyer, the loss of their production can lead to significant liabilities for you. Without adequate protection, you might have to self-insure, liquidating assets and potentially future income. It’s crucial to assess these risks. In our Perpetual Wealth Strategy, we emphasize wealth building and creating cash flow. But if a disruptive event wipes everything out, it defeats the purpose. That’s why we prioritize protection, ensuring risks are covered efficiently.

Wade Reed: Many people believe that protection might be an unnecessary expense, thinking it detracts from their wealth potential. But consider this: if you don’t transfer risk through insurance products, you bear the full responsibility. This means you might need to keep large sums, even millions, on hand to self-insure, especially if you’re a business owner with more at stake. This approach is actually inefficient since that money could have been used for business growth or investments. Transferring risk is a more efficient strategy. I’ve seen several instances where the lack of proper protection led to catastrophic losses.

Patrick Donohoe: And while these events might never occur, it only takes one disruptive event to cause significant damage.

Wade Reed: Exactly, just one event can change everything.

17:32 How does the protection path ensure wealth building with certainty?

Patrick Donohoe: The typical approach to personal finance often revolves around wealth-building activities, which primarily involve investments diversified based on one’s risk profile. However, it’s essential to consider the protection path. Wealth doesn’t just accumulate overnight; it requires time and consistency. The most significant growth in wealth-building, due to the nature of the compound curve, happens towards the end. To ensure this growth, you need to start today and protect your investments. If a disruptive event forces you to self-insure, you might have to liquidate everything, face penalties, lose interest, and essentially start from scratch.

Wade Reed: That kind of setback can be devastating to your wealth accumulation curve. We know that wealth accumulation is a slow build, gradually becoming steeper over time. But if a catastrophic event disrupts this curve, you might be set back by decades. Take, for instance, a minor car accident that costs between $12,000 to $15,000. A few years ago, my wife was rear-ended. The party at fault had state minimum insurance, which covered $25,000. However, we had a small business selling products on Amazon. Due to her concussion from the accident, we couldn’t operate the business. Thankfully, we had underinsured coverage on our own insurance, which allowed us to claim and recover $100,000 a couple of years later.

19:34 Which free tools can you use to assess your income and asset protection?

Patrick Donohoe: When we consider risk profiles, it’s essential to recognize the subtle nuances that can make a significant difference. On the Paradigm Life portal, we’ve introduced a tool for our clients called Wealth View 360. It provides a comprehensive snapshot of one’s entire financial life on a single page. This tool has dedicated sections for asset protection, insurance, entities, and even income protection. While we can delve deep into the myriad ways to cover potential risks, it’s crucial to regularly evaluate and identify where you might be exposed.

Another aspect I’d like to highlight is the unique financial product we offer: our whole life insurance. This product stands out due to its multifaceted benefits. Over the years, we’ve had hundreds of clients at Paradigm who’ve unfortunately passed away prematurely. Life insurance plays a pivotal role in replacing the income production of the deceased.

Wade Reed: It’s also worth noting the asset protection components in the realm of estate planning. Estate planning encompasses wills and trusts. Many people often overlook the need for estate planning, thinking it’s not necessary for their situation. However, these tools have become increasingly accessible and affordable. Everyone should consider having them in place to ensure their assets and loved ones are protected.

21:00 Why is estate planning important?

Patrick Donohoe: Evaluating estate planning is crucial. We’ve seen situations where clients passed away prematurely without proper estate planning. As a result, a significant sum of money goes to their beneficiaries without any guidance. This often does more harm than good. Human nature dictates our financial behavior. When people receive a large sum, they often feel it’s going to last forever. This is evident in situations like lottery winners or professional athletes receiving large payouts. Many of them end up bankrupt. The essence of estate planning is to ensure that if something happens to the primary earner, the income is directed to beneficiaries in a manner that supports them adequately, based on the circumstances. Proper estate planning ensures the right direction for those assets.

Wade Reed: I’ve witnessed the importance of this firsthand. Before becoming a wealth strategist and financial coach, I spent four years in banking. I often encountered individuals coming in with death certificates, setting up donation accounts because their loved ones didn’t have life insurance. It was shocking. Term insurance is so affordable; it’s puzzling why some don’t even have that basic coverage. Another observation was when people came in with a last will and testament. They’d often ask for access to the deceased’s bank accounts. However, without validation from the probate court, I couldn’t grant them access. This process could take weeks or even months. On the other hand, if they had a trust and were the named successor trustee, I could provide them access to the assets immediately upon presenting the necessary documents. This not only saves time but also reduces the emotional strain during an already challenging period. Having the right legal documents in place is a form of protection, ensuring a smoother transition of assets upon death.

24:24 How does Wealth View 360 enhance your wealth protection?

Patrick Donohoe: Let’s discuss Wealth View 360, our free tool. It’s designed to help you organize not just your net worth, cash flow, assets, and liabilities, but also your asset and income protection vehicles. This gives you a comprehensive snapshot of your current financial status, facilitating a productive discussion with your wealth strategist. Moreover, for our Paradigm Life clients, we’ve partnered with several organizations specializing in areas like commercial and business insurance, health insurance, asset protection, and estate planning. We’re making these expert relationships available to our valued clients. I genuinely believe in the power of this tool.

Wade Reed: Over the years, I’ve guided clients using a four-pronged approach I call “Becoming Awesome with Money.” It’s an acronym: O for getting organized, S for building systems, another O for optimizing those systems, and M for maximization. Wealth View 360 fits perfectly into the “organized” category. It encourages you to consolidate your financial information, helping you spot gaps or areas of improvement. With this tool, we, as your wealth strategist team, can better support and guide you.

Patrick Donohoe: To wrap up, the Perpetual Wealth Strategy is all about enhancing the quality of life. While protection might not seem as glamorous, it’s a fundamental component. Think of it as the unseen foundation of a building or the roots of a tree. Both are crucial for stability and growth. We live in a world full of risks, but with the right strategies, we can minimize them. This peace of mind allows us to approach life with a positive attitude and energy, opening doors to opportunities and fulfilling experiences.

Wade Reed: Absolutely agreed.

Patrick Donohoe: Thank you for joining us on this episode of the Perpetual Wealth Podcast. We’ll see you next time.

Wade Reed: Thanks, Pat.

Patrick Donohoe: Thanks, Wade.