Episode 95: Why We’re Programmed To Misunderstand Our Own Death/Disability, And How To Best Insure Yourself

Apr 26, 2021

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The work of Nassim Taleb expresses part of the reason that we are bad at understanding how probabilities relate to real life, especially when it relates to some adverse event in our own lives. This episode explores how probabilities are “hiding in plain sight” and how robust insurance is a luxury in which physicians should partake in order to neutralize the impact of a low-probability, high-magnitude negative event.


Justin (00:01):
This week, we are going to spend a little time talking about the noble Turkey. We understand that in America, that Turkey has special significance. Ben Franklin Philadelphia’s proudest son actually wanted to make the Turkey, the official bird of the United States instead of the bald Eagle, which now looking back seems a little bit crazy. I want to tell a brief anecdote today to describe why turkeys are notoriously bad at using datasets and past performance. To understand that the probability of future adverse

Justin (00:34):
Outcomes and what we can learn from this noble creature. This is episode 95 of APM success. You’re probably wondering where this is going, but stick with me.

Justin (01:11):
A Turkey spends its entire life thinking that everything is great from a statistical standpoint with each passing day, a Turkey born say at the end of November has more and more data to support it’s assertion that not only is life good, but the world actually revolves around it. Functionally a Turkey is well fed. It is pampered through the springtime and into the summer. Its needs are graciously met by its attentive overlords into August, September and October. All this time, the Turkey has a growing body of data to suggest that this treatment will continue on into blissful Turkey eternity, sometime around Halloween, the Turkey notices decorations popping up, maybe an overflowing cornucopia, some third grade cutouts of pilgrims and native Americans holding hands. The gracious overlords are increasing the daily feedings and tending to the Turkey’s needs more than ever before. And the Turkey discerns, a strong, positive and encouraging trend about its future prospects.

Justin (02:14):
You perhaps can see where the story is going. Eventually Thanksgiving will come and this Turkey will understand that 364 days does not an entire trend. Make humans like turkeys are not hardwired to understand probabilities and apply them in any kind of meaningful way to their own lives. A misunderstanding of these probabilities can be devastating. This previous example has been taken from a book by NASA to lab. One of my favorite authors the book is called the black Swan, which I highly recommend along with another favorite of mine fooled by randomness, both of which I’m going to link to in the show notes. I think that these are critical reading for understanding how the world works and how we often mistakenly assign to skill. What can be fully explained, explained by a few standard deviations and probability of outcomes population. If you’ll indulge me one more example, just because I think this is really fascinating and could change the way you see the world, especially as it relates to things that could be construed as lucky.

Justin (03:22):
Imagine you have a line of a million people and you give each of them a penny, you have them flip that penny and roughly, you know, 49 and a half times out of a hundred it’s heads. And the other half of the time it’s tails a time they flip the coin of these million people. Only the people who land on heads will stay in the line. Everyone who flips tails steps out of line and they go go home the line flips and flips and flips, and the line gets smaller and smaller and smaller. And yeah, and finally, after a, perhaps a few dozen flips, there was maybe one or two or three people remained. There’s two potential explanations for these groups of extraordinary head flipping people. One is that they are really, really skilled. It’s flipping coins and landing on heads every single time.

Justin (04:14):
The other is that they are just the result of a statistical distribution based on if you have a million people and they flip a coin, you know, 24 times roughly, you know, one or two or three standard deviations worth of the tail is going to have a few people in it that are going to have just by dumb luck, literally by chance, by probabilistic expression of this circumstance, they’re going to remain having done this extraordinary feat of flipping heads this many times. So understanding probability is it’s, it’s not always intuitive and they’re all around us and understanding the impact of probabilities on our lives is something that we have to take a very rational approach to and informing ourselves of data. Sometimes isn’t even sufficient. We need to understand how we’re wired to misinterpret this data and act accordingly. So what I want to talk about today is the likelihood that any single physician in this instance will experience their own personal black Swan event.

Justin (05:22):
Like the Turkey in the summertime for many of us, life is good. If we look on a micro or a slightly less than micro so scale, but our ability to calibrate our future based on history is frankly they totally off base and unreliable at best. There may not be any relationship between what we’ve seen in the past and what we’ve seen, what we will see in the future. This obviously doesn’t mean that we’re headed for a dramatic and premature end necessarily, but it does mean that we have no way of knowing the future just because things have been great doesn’t mean things will continue to be great, or even that

Justin (06:00):
There’s a low probability

Justin (06:02):
Of something bad happening in the future. In addition to understanding this sort of personal catastrophe in terms of specifically disability or death, I want to talk about magnitude for a minute. So the personal catastrophe of of a full disability event or of a death is so costly. So incredibly damaging in the life of an individual or a family that even though it is quote unquote expensive in terms of actuarial odds, to ensure oneself by paying insurance premiums, that we could construe as high, we are much better off a physician is much better off

Justin (06:50):
Taking home only 98.7%

Justin (06:54):
Of the income that they would have otherwise captured. And putting that 1.3% of their income each year towards disability income insurance, rather than self-insuring. And by self-insuring, I mean, not carrying insurance and basically trying to have enough money in the bank to protect yourself. And here’s the reason it’s the magnitude. Sure. It’s a low probability event, but the whole point of insurance is to protect against an unlikely but utterly devastating event, furthermore, to protect against that event in a robust way so that this significant damage to your life can be in some way, mitigated by hopefully a really beefy insurance policy. So I’m going to take a minute and explain a couple of examples and give some philosophical perspectives of mine as a financial advisor, who has seen people go through disability and life insurance claims and has seen the real life impact and has also, I’ve spoken with many other advisors who have frankly seen this.

Justin (07:53):
You talk to any 60 year old advisor, who’s been in the industry for 30 years. They live long enough to have more than a handful of stories about insurance claims. So I’m going to tell you some things that I think this is not financial advice. This is not a recommendation to buy any policy or to use any specific strategy. I’m just going to try to give you some context to equip you, to make decisions that are going to serve you and your family. Well. So to use some round numbers, if you make $400,000 a year as an anesthesiologist, and you start at age 30 to earning this income and you work until age 62, that’s 30 years of income representing $12 million of earnings. These numbers are so large, frankly, that it’s hard to really understand what it means in terms of actual real life impact.

Justin (08:42):
And obviously there’s taxes and inflation. I’m going to exclude that for a moment, but here’s what I’m saying. When you’re a physician, you are afforded certain luxuries in life luxuries that you’re afforded because of the trade-offs that you have made you really hard all through your twenties. You have deferred significant income for a decade beyond undergrad. When many of your peers went into the workforce and started making money much earlier and perhaps saving and building wealth, also taking on debt in order to position yourself with rare skills. One of the luxuries that this affords you is to be able to have really robust Cadillac insurance policies without meaningfully impinging on your lifestyle in any way, the difference between a crappy long-term disability policy and a really robust one differences less than 1% of your annual gross income. And yet I’ve seen on more than one occasion cases where physicians express something cost sensitivity around this particular purchase around this premium at precisely the wrong time, in my opinion, because I think in part, because the engine that we have mentally to calculate the trade-offs in our head and in our gut is missing calibrated.

Justin (10:01):
We don’t properly understand the risk of an adverse outcome, and we don’t properly understand the magnitude of that adverse outcome. Again, more disclosure biased towards full and robust insurance, because the cost is really diminimous compared with the value of that appropriate insurance coverage in a time of need. So in order to unpack this principle, I want to give two specific anecdotes or examples of places that leave this miscalibration this inappropriate assessment of the risk reward trade off of insurance is most frequently manifest. And see, what does this mean in the life of a physician? Who’s trying to take advantage of their ability to afford robust insurance protection without impinging on their lifestyle. The first is first is more obvious. The second is less obvious with regard. So the more obvious example, disability, income insurance long-term disability income insurance specifically is far and away the most important insurance coverage.

Justin (11:10):
In my opinion, that any physician, especially in early career physician possesses, why is this, what is your biggest asset as an early career doctor? It’s not your, I mean, it’s really not any of your liquid financial assets, unless you’ve inherited a bunch of money. It certainly isn’t like your negative net worth from student loans. It’s your ability to earn an income, a high income for an extended period of time. Your asset is that unearned salary slash bonus slash production compensation for three decades. And if for some reason you can’t earn that income, it’s going to be a catastrophic outcome for you. So ensuring that income in a robust way, with one of the six big insurance carriers that has true own occupation, definition of insurance with a cost of living adjustment with the appropriate riders, to be able to expand that coverage over time is very important.

Justin (12:11):
So principal Ameritas, mass mutual guardian slash Berkshire standard and Ohio national. Those are the six insurers with robust definitions around own occupation. And I do a deep dive on definitions and nuance around disability insurance back in episode 73 with a guy who’s much smarter than me about the topic Larry Keller. So if you want to hear more about disability coverage, go back to episode 73. We even have some specialty specific considerations in anesthesia and pain that you’re gonna want to hear about, but in, I basically just tell people, get the most disability coverage you can. It’s one of those things it’s, you know, it’s gonna cost you in many cases, one to 2% of your gross income, but the, because of the magnitude of the loss, the potential loss it is, it’s just something that makes so much sense to get the most of that you possibly can.

Justin (13:06):
The second place that I think there’s an opportunity that is underappreciated is for stay-at-home spouses and specifically life insurance for stay-at-home spouses. Now, obviously anybody who’s young ish in their thirties, forties, fifties, actuarially speaking, you’re going to have a long, healthy life, but this is another situation where an adverse outcome, a premature death of a spouse, even one who doesn’t have an income can have such a devastating personal family and yes, economic impact that it is worth insuring in a robust manner. So if you have a couple of kids at home and a stay-at-home spouse, you want to think about getting a million or two potentially have term life. I’m talking 20, 25 or 30 year term coverage. And here’s why imagine God forbid your spouse who is taking care of your kids and not earning money outside the home, but contributing significantly economically through managing the household, dies tragically and prematurely.

Justin (14:12):
If you’re making that anesthesiologist income in the real world, particularly if you have a lifestyle that has expanded to consume some or all of that income, you’re likely going to want or need to recalibrate your life to adjust in the aftermath of this tragedy. This is exactly what a black Swan is. It’s an unlikely event that may be unforeseen is difficult to anticipate. And the point is that if this happens to you, even as a high earning physician, you want the flexibility to be a parent to your kids. That’s a space parent to be a parent, to kids, to help them through an immensely difficult loss. You want to be not financially stressed during that time. You don’t want to be worrying about being able to afford childcare without sweating. You don’t want to be worrying about scheduling drop-offs and pickups because you have to keep on picking up extra shifts to pay your bills, not to mention the emotional and personal and relational circumstances in your own life for your own mental wellbeing that are going to require your keen attention for probably years.

Justin (15:23):
I’ll be honest. I haven’t seen my clients in this particular situation, but I have heard from other advisors whom I respect some very recently describe in painful detail that if a stay-at-home spouse had another one to 2 million of 30 year term coverage, that is never too much. And they’ve seen instances in which a stressed out grieving spouse who wants to be there for their kids, has a lifestyle that needs to continue to be supported. And so there’s massive tension there. So this is a circumstance in which you’re going to spend a little more you’re going to buy a policy that, you know, it’s not going to be a huge amount, maybe 800 1,015 hundred per year. So we’re talking about, you know, a hundred bucks a month ish. And this is the luxury, right? You can afford this without changing your lifestyle. So what I would encourage you is take advantage of this luxury, get the robust risk protection so that if the unthinkable happens, you can make the best out of a really tough situation.

Justin (16:26):
So I’m getting a little emotional and a little soapboxy here because I’ve seen these circumstances. And I so strongly believe in this principle of robust insurance coverage for people who can afford it. For me, recent events, conversations, people that I know, people that other advisor friends of mine are close to have caused me to, to be honest, revisit advice that I’ve given on these particular items, especially like strongly encouraging. If there’s a, a client who’s not as interested in buying as much coverage as they can. I, my opinions about this are evolving and I’m going to start being a little more encouraging even in the face of them pushing back like this is a really, really good idea. And I really think that it’s important to get the best coverage and protection that you can. So here’s the point. This is a message. Hopefully calling you to action.

Justin (17:22):
Don’t hear this and then set down your emotional burden without moving forward to protect yourself and your family. When insurance sales people do this in the middle of a sales pitch and they pull on your heartstrings. It’s seen as manipulative, even if it is technically correct. In some circumstances, I have no incentive in your life financially. I just want to see you change your life in a tiny way, perhaps by an increased premium or a new insurance premium to get this robust protection. That could mean everything to you later on. It’s the coverage that you hope you never have to file a claim on, but if you need it, you’re so glad that it’s there. And in closing, do yourself a favor and read some NASA lab I’ll link to him in the show notes, it could change the way you process everything around you related to probabilities skill, outcome, black swans. He talks a lot about stock-picking and he has a good analogy. You know, the coin flipping example, he talks about mutual fund managers, the best mutual fund manager in the pile. Yeah, they might’ve been a genius savant, or maybe they were just that person in the line of a million who flipped heads 24 times because statistically it had to be somebody. And so it was them. So it could change the way you see things. That’s all I’ve got for this week.

Justin (18:42):
Tweak. I promise it will be a lighter topic as always. Thank you for listening. If you liked what you heard this week, I don’t over to APM success.com, where you can find more content and free resources to help you build a successful career in anesthesia and pain management. If you want it to leave a review in iTunes, that also really appreciate it. Thanks for using some of your valuable time to join me today on APM success.