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Risk Management – Protect What You've Worked ForSubmitted by Integrity Advisory on October 16th, 2018
Most people couldn't bear the financial hardships resulting from unexpected events, such as a house fire, car accident, disability, or the premature death of a family member. This is why a personal risk management strategy is one of the most important components of your financial plan.
The Steps to Managing Your Risk
Because there isn’t a one-size-fits-all plan that fits the unique needs of every family, risk management is a process that focuses on the problem of risk at every level of a family’s lifestyle in order to arrive at a solution for each one. Each risk calls for separate measures, which usually require separate forms of insurance. Because risks at higher levels often require specialized methods and tools, the process involves a collaboration of various experts working under a coordinated plan in order to develop the most efficient and effective risk management plan.
There are four primary steps to the risk management process:
- Identify and analyze loss exposures
- Identify and examine risk management alternatives
- Implement chosen risk management techniques
- Monitor and measure the risk management program to seek improvements and adapt to changes
Identify and analyze loss exposure
In analyzing loss exposures, each risk is examined from three vantage points:
- The value that is exposed to loss
- The peril that could cause the loss
- The probable financial consequences of the loss
This step in the process is carried out for each loss exposure - home, autos, collectibles, watercraft, professional liabilities, personal liabilities, etc. Each loss exposure is analyzed in light of the family’s personal objectives for security and financial protection. Each will require its own safety measures and risk management strategy.
Identify and examine risk management alternatives
Just as there is no one-size-fits-all plan for all families, there are no over-the-counter risk management solutions for any particular loss exposure. Alternatives must be examined for their effectiveness and efficiency in meeting the specific criteria and needs of each family. Alternatives include risk control methods and techniques, as well as risk transfer through insurance. In most cases, the solution will include both, based on the balance the family wants to strike between reducing the risk (which can interfere with lifestyle choices) and transferring the risk (buying higher limits of coverage).
Select the best risk management technique(s)
Selecting the best risk management techniques will come down to choosing the ones that best fit the family’s lifestyle and provide the optimal level of protection. Equally important, any method selected needs to be integrated into the overall risk management plan to ensure that there are no gaps in coverage, and to be sure that the family is not overpaying for coverage.
Implement chosen risk management techniques
As with any plan, implementation is the key to the success of a risk management plan. Strategies or techniques for each loss exposure must have their own implementation action plan. This might include installing equipment, contracting a specialist, a timeline, financing, and a process for monitoring. Again, each piece of the puzzle must fit together in a well-coordinated program to ensure there are no overlaps and no gaps.
Implementation must also include a complete indoctrination of family members and trusted advisors in the strategies and techniques used, and a clear channel of communication established between everyone involved.
Monitor the risk management program
A risk management plan is similar to a financial plan in that changing circumstances could impact the effectiveness of the plan. With a high net-worth family, circumstances change as their net worth increases, or when they buy a bigger home or additional toys. Any change in lifestyle can present a new loss exposure that must be run through the risk management process.
In addition, existing strategies or techniques can always be improved, especially with advancements in technology. It is important that an at-risk family continuously improve and upgrade their strategies because those who seek to harm or exploit them are always upgrading theirs.
What Does Risk Management Look Like For You?
Fully protecting your and your family’s financial future against the unexpected will help you to move forward with greater confidence in your wealth management decisions. What exactly does it mean to “fully” protect your financial future? Of course, it involves insurance planning and the purchase of different types of insurance. But before you overextend and become insurance poor, it would be important to carefully assess your risk exposures and develop a risk management plan that fits your particular needs. That requires a full understanding of all of the protections available to you and how to optimize their capacity to protect you.
Disability Income Protection
For most people, their most valuable asset is their ability to earn an income. Becoming disabled for a period of six months or longer could have a much greater impact than many other threats to your financial security. Obtaining the best possible disability income protection plan should be your top risk management priority. Because your risk of disability increases as you get older, disability insurance can become very expensive. The best time to consider purchasing disability coverage is when you’re young and healthy.
The most important considerations for purchasing disability insurance are:
- Obtaining a policy that protects your occupational specialty for as long as possible
- Insuring future income increases
- Relying on an individual disability insurance plan first, and only using a group plan as a supplement
Disability income planning has become a specialty in the insurance industry, and it would be important to work with a disability specialist with access to the top disability insurance carriers in the industry.
Property and Casualty Protection
Generally, property and casualty insurance (P&C) protects us against financial loss resulting from damage to our property, as well as the liability resulting from someone getting hurt on our property. Auto insurance, homeowner’s insurance, renters insurance, and personal liability insurance are all forms of P&C coverage. The general rule is "if you own it, insure it".
The other consideration when it comes to P&C coverage is: Don’t skimp on your coverage to save money; rather find all ways to optimize your capacity in your insurance coverage. For example, choose the highest possible deductible for which you are financially able to cover. Paying a $1,000 deductible for a dented bumper or covering the first $2,500 of the cost of a roof replacement won’t break you. The higher deductible levels will lower your premium costs which should be redirected towards increasing your liability limits.
Personal Liability Protection
One of the least understood forms of protection is personal liability insurance, and with its capacity to form an umbrella of financial protection for a low cost, it can also be the most overlooked. Most people don’t consider it because they think they have plenty of liability coverage in their homeowners and auto insurance policies. In reality, most people are just a slip on a banana peel away from a major lawsuit. For a few hundred dollars a year, you can provide yourself with a million dollars of umbrella protection. As a general rule, you should have umbrella liability protection to equivalent to the value of all of your assets.
Life Insurance Protection
The purchase of a life insurance policy may never make anyone's top ten list of favorite things to do. But, when given the opportunity to consider the range of purposes it can serve, it could turn out to be the most important financial instrument you own. Here is why:
It creates an instant estate – Life insurance creates the capital a family needs when there are sufficient assets to cover their needs.
It provides tax advantages – Life insurance has tax properties that make it attractive as a financial instrument. The death benefit is tax free to the beneficiaries.
It’s cost effective – Life Insurance is a financial instrument with potential to provide the capital needed to provide for surviving family members or to settle the costs of a large estate, or to buy out the family of a deceased business partner, as inexpensively as life insurance.
The mistake many people make is to wait too long before purchasing life insurance. As with disability income insurance, the time to buy life insurance is when you are young and healthy.
Life insurance policies contain exclusions, limitations, reductions of benefits, and terms for keeping them in force. We can provide you with costs and complete details.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.
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