Out on the highway, do you drive in the slow lane or the fast lane? Do you slow down or speed up when you see a yellow light ahead? Everyone has a different attitude toward risk and risk-taking. This is as true of our financial lives and choices as it is in other life situations.
For example, an unexpected event such as a death, disability, or other personal loss, is certainly not something for which you can easily plan. Yet, the financial ramifications can be staggering—not only to you but to your family, as well. Therefore, it is important to create a risk management plan as part of your overall financial strategy.
Insurance, in all its varied forms, is simply a method for managing risk. In order to plan an effective insurance program, consider what risks you and your family are exposed to and how a financial loss would affect you.
All Risks Are Not Created Equal
Some risks may be so small that you decide to accept full responsibility for any potential loss. In insurance language, you “self-insure” for such risks. For example, it is rarely cost-effective to carry collision coverage on a 10-year-old automobile. In making this choice, you assume full responsibility for any accidental damage you may cause to the vehicle.
In other situations, the risk may be so large (or the cost of any potential loss so great) that the best strategy is to try to avoid the risk entirely.
Risk Transfer and Risk Sharing
Insurance is a method that allows you to transfer risk you cannot afford, or choose not to accept. A homeowners policy transfers the financial risk of rebuilding after a fire to an insurer. Even in situations of risk transfer, it is common to share some risk. For example, the deductibles and premiums you pay for insurance are a form of risk sharing—you accept responsibility for a small portion of the risk, while transferring the larger portion of the risk to the insurer.
Consider these other important insurance options.
- Between the ages of 25 to 35, for example, many couples are just starting out—getting married and establishing families and careers. During these years, the death of one partner could seriously jeopardize the surviving spouse’s or family’s financial future. In such situations, a life insurance policy death benefit can help provide a continuing source of income, pay off a mortgage, or help fund a child’s education.
- Additionally, many people give little thought to how they would handle financial responsibilities if their income suddenly stopped for an extended period of time. Disability income insurance can help replace a portion of income, should you experience a disability.
If you think of your insurance policies as important pieces of your “financial puzzle” then it makes perfect sense to seek out and get input from a financial professional who can make recommendations that actually fit your life and needs, keeping both your short and long-term financial interests in focus.
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Material discussed is meant for general illustration and/or informational purposes only, and it is not to be construed as investment, tax, or legal advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary. Therefore, the information should be relied upon when coordinated with individual professional advice.