An important part of financial planning is risk management. Eliminating the potential damage risks could do to our future financial security is the key to a good financial or retirement plan. There are three basic principles behind risk management in which you can approach any risk that you face:
Risk Management Principle 1) Find ways to avoid our risks
Is there a way to just not go there or not put yourself in that position? For example, don’t jump out of an airplane.
Risk Management Principle 2) Find ways to reduce our risks
What can we do to lower the risk or reduce them so that we’re in a better position or lesson the damage? For example, only jump with a parachute and tethered to an instructor.
Risk Management Principle 3) Insure the risks
For example, buy parachute malfunction insurance. Just kidding, actually that would be accident, disability, dismemberment, health and life insurance. Ouch!!! We can work on some of those things by being in better health, having a better diet and exercising more, etc. Maybe that can help us reduce some risks, but it doesn’t necessarily help us avoid the hit to our financial security. So, that’s a risk we might need to insure if it makes the most economic sense.
The 6 Financial Trauma Catalysts
So we’ve looked at three ways we can strive to manage risks, one of them being Risk Management Principle 3) Insure the risks. Let’s take a closer look at some of the risks where we could implement this third principle. We’re going to call these risks “Financial Trauma Catalysts” as that’s what these risks could end up being if they manifest themselves – they could be the catalyst for some form of financial trauma.
Financial Trauma Catalyst 1) Sickness
Here, we need to think about our health insurance, and as we get older and retire, Medicare, and long-term care insurance for care in later years.
Financial Trauma Catalyst 2) Loss of income
The risk of loss of income is something we can try to mitigate using private disability insurance that would pay if we couldn’t work anymore. We can also look at what Social Security and Medicare disability would do if we lost our income.
Financial Trauma Catalyst 3) Home & property theft, destruction & liability
So with this risk, we can look at property insurance, which is not only to replace our property if we have a fire, theft or calamity. but to protect our assets if somebody comes on our property and gets injured or we hit somebody accidentally with our car. Umbrella insurance is not for rain but to cover all our property with an extra amount of coverage to increase the amounts insurance would cover.
Financial Trauma Catalyst 4) Business liabilities
General business liabilities, errors & omissions, medical malpractice issues, potential liability related to real estate ownership or equipment leasing- these are all examples of things that fall under the risk of business liabilities. Here we can look at several different kinds of insurance to attempt to minimize risk exposures.
Financial Trauma Catalyst 5) Investment losses
This is certainly a big risk when it comes to retirement plans or financial freedom. There’s really no easy answer here but one example of something to look at would be to use annuities where and when appropriate as a way to attempt to protect some retirement income.
Financial Trauma Catalyst 6) Death
And finally, probably the most unpleasant risk to consider. Here we can look at life insurance to cover whatever liabilities, debts, income needs the estate or survivors might need or you might want to provide for. Some good news here is these areas are fairly straightforward to calculate the proper amounts of coverage in each area.
We’ll discuss each one of these in more detail in future blog posts, but it’s really hard to have a solid financial plan without planning for risk management and trying to make sure that we don’t fall prey to some hazard or peril that can come up in our lives.
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