When you are starting out with a new career or relationship, it's a good idea to work with a financial advisor to create a long-term financial plan. A risk management plan should be part of your overall financial strategy. Why? You cannot plan for an unexpected event such as a death, disability, or other personal loss. Yet, the financial ramifications can be staggering—not only to you but to your family, as well.
Insurance is all about managing risk. The first step in planning an effective insurance program is to evaluate the 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. Rather, it makes sense for you to assume full responsibility for any accidental damage 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 for transferring risk. A homeowners policy, for example, shifts the financial risk of rebuilding after a fire to an insurer. Even in situations of risk transfer, it is common to share some risk. Take for example the deductibles and premiums you pay for insurance. They are a form of risk sharing in which you accept responsibility for a small portion of the risk while transferring the larger portion to the insurer.
Consider these additional insurance options.
- Life insurance. When you are a young couple just starting out—getting married and establishing families and careers - the death of one partner could seriously jeopardize the financial future of the surviving spouse or family. A life insurance policy death benefit is designed to help provide a continuing source of income, pay off a mortgage, or help fund a child's education.
- Disability income insurance. Do you have a plan for how to handle financial responsibilities if your income suddenly stopped for an extended period? Disability income insurance can help replace a portion of income, should you experience a disability.
If you think of your insurance policies as essential 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 fit your life and needs, keeping both your short and long-term economic interests in focus.
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.