If we want our plans to succeed we need to understand the factors that might hinder that success, risks, and, one way or another, make sure they don't get in our way.
... continued below
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Insurance: Why worry? ... continued from above
During our lives all of us are exposed to
the possibility of a variety of risk events such as:
- Work accidents
- Major illnesses
- Death
- House fire
- Motor accidents
- Theft
While death is of course inevitable at
some time, some of the other risk events may never happen. Also the
likelihood of some of these risks occurring may be greater at particular
stages of our lives. For instance most major road accidents involve
younger people while most major illnesses occur with advancing age.
Also at different times of our lives our
financial plans and our dependents are more vulnerable to the financial
effects of the risk events occurring. For example a family with young
children, a large mortgage and only one breadwinner would experience
tremendous pressure if the breadwinner became incapacitated for one reason
or another.
The following chart illustrates how some
risks and their insurance remedies may assume more importance at different
stages of our lives:
|
Concerns
|
Early Years
|
Midlife
|
Wind Down
|
| |
15-24
|
25-34
|
35-44
|
45-54
|
55-64
|
65+
|
|
Debts
|
*
|
***
|
***
|
**
|
*
|
|
|
Children
|
|
**
|
***
|
**
|
*
|
|
|
Spouse
|
|
***
|
**
|
*
|
*
|
|
|
House
|
|
***
|
**
|
*
|
*
|
|
|
Parents
|
|
*
|
*
|
**
|
***
|
*
|
|
Job Loss
|
*
|
***
|
***
|
**
|
*
|
|
|
Car Crash
|
***
|
**
|
*
|
*
|
*
|
**
|
|
Work Accident
|
***
|
**
|
*
|
*
|
*
|
|
|
Long Term Illness
|
|
*
|
**
|
**
|
***
|
***
|
|
Traumatic Illness
|
|
**
|
**
|
***
|
***
|
***
|
| Type
Of Protection Needed |
|
|
15-24
|
25-34
|
35-44
|
45-54
|
55-64
|
65+
|
|
Medical Services
|
*
|
**
|
**
|
***
|
***
|
***
|
|
Income Replacement
|
**
|
***
|
***
|
***
|
**
|
|
|
Lump Sum
|
*
|
***
|
***
|
***
|
***
|
|
|
Long Term Care
|
|
|
*
|
**
|
***
|
***
|
|
Property
Replacement
|
***
|
***
|
***
|
**
|
**
|
**
|
HIGH IMPORTANCE ***
MEDIUM IMPORTANCE **
LOW IMPORTANCE *
The chances of being able to accurately
predict when a risk event will happen are very slight. Occasionally there
will be symptoms of the onset of a disease but usually these things come
out of the blue.
Therefore, if our finances would be
vulnerable to the consequences of a risk event, it would be wise to
protect ourselves and our dependents against those consequences. This can
be done in a number of ways, from taking steps to ensure that we are not
endangered through to purchasing insurance that would compensate for the
financial consequences of the risk event occurring.
Here are five steps that can help to
manage personal risk:
1. Identify the risks
that you are exposed to now and in the future.
You should look at the risks that may
affect your body or that of your partner, such as death, disability,
illness and the need for long term care due to aging. And you should
consider risks from theft, fire and other misfortunes relating to any
property you may have.
Another risk that some readers may need
to consider is the risk that someone may decide to sue you for a loss that
they consider you have caused them. This can particularly affect
professionals and tradespeople. Often having adequate Professional
Indemnity Insurance is a condition of operating in a particular field but
if this affects you, you should ensure that your cover is adequate against
likely successful claims.
2. Analysis of Risks.
The answers to the following three
questions will provide a good basis for your risk management program:
- What is the potential loss if the risk
event occurred?
- Who will suffer the loss?
- How likely to occur is it?
The way they can work is illustrated in
the following example:
Bill and Sue are in their early 30's and
both have good jobs earning $50,000 and $40,000 respectively. They are
paying $15,000 p.a. on the mortgage on their house and are saving $20,000
p.a., half in superannuation and half in other investments. Sue is about
to leave the workforce to start a family and they need to consider what
would be the impact of any reduction of Bill's earning capacity.
The answers to the three questions could
be:
If Bill was completely incapacitated, the
family income could reduce to zero, they could deplete their savings and
in the worst case they could lose their house due to their inability to
continue their mortgage payments. As well as their living expenses they
need to consider the impact of medical bills which could make the
situation worse. The situation could be eased if Sue were able to go back
to work.
They would suffer these financial
consequences directly. They could face extreme financial hardship which,
of course, could drastically affect their child's future prospects. If
Bill were to die he would not feel the financial effects himself but Sue
would have to cope with the double whammy of financial disaster and grief
at his loss.
In this instance, too much hangs on one
person's health for it not to be vital to insure Bill against death and
disability and to have good medical insurance for the whole family.
However, his family medical history may give some pointer towards the need
for particular protection.
Of course this is only one of the risks
of death that this family is exposed to. They would also need to analyse
the implications of any misfortune that could befall Sue. If she were to
die or be disabled with a young family, the last thing Bill would need on
top of his grief would be the extra financial costs of housekeeping and
raising the children.
3. Reduction of Risks.
This is the process of doing something
that will reduce the likelihood of a risk event happening. Again a set of
three questions can be asked:
- What precautions can be taken?
- Are the precautions reasonable?
(remember you have to live and
enjoy your life).
- What will be the benefits of taking
the precautions? These could be
reduced insurance premiums or other side benefits.
Often simple precautions like installing
deadlocks or always locking the car can reduce the likelihood of loss
quite considerably. And reducing weight, eating healthy food and giving up
smoking can reduce the likelihood of early traumatic illness. You might
even find that some of these actions (e.g. giving up smoking) can make
your insurance cheaper too.
4. Consider Retaining
Some Risk
It could be that the cost of obtaining
protection might outweigh the benefits. Or the likelihood of the risk
event occurring is very slight or its cost could be easily afforded. In
these instances it may be prudent to retain the risk yourself, to
self-insure.
Decisions on retention should not be
taken until the previous three steps have been completed. It is also vital
that we don't underestimate the consequences of the risk if we decide to
self-insure. Remember we can't go back and tidy up once the event has
happened. It is therefore prudent to get expert advice before taking this
option.
However once a risk is identified,
analysed and reduced as much as possible a rational decision to self
insure may be considered. The questions to ask at this stage are:
- If the event does happen what will be
its financial impact? (can
you afford it?)
- Can you afford the insurance premiums?
- Can part of the loss be afforded?
- Do the premiums represent good value?
5. Buy Protection
Against the Financial Consequences of the Risk Event
When you have decided it would not be
prudent to carry the financial consequences of the risk yourself you need
to purchase appropriate insurance protection. This transfers the financial
consequences of the risk event to the insurer and to compensate them for
taking on that risk you pay them a premium.
The act of buying insurance does not
reduce the likelihood of the risk event occurring but it does mean that
the financial consequence is removed or reduced. In our earlier example,
insuring Bill's life for a large amount will not reduce the likelihood of
his death but it does mean that if that unfortunate event was to occur Sue
and the family could cope financially.
The range of insurance cover that can be
purchased is extremely broad. Cover for just about every conceivable risk
is available. Some policies cover a number of related risks while others
are very specific covering only the financial consequences of a very
particular risk event. Some risks are covered by the policies of a number
of insurers while for other more specialised risks only one or two
insurers provide cover.
Different insurance policies provide a
wide variety of different benefits which may include:
- A specific lump sum of money.
- A lump sum of money plus bonuses
related to the company's
investment performance.
- Cost of replacement of or repairs to a
damaged or stolen item.
- Provision of a stream of income
- Meeting all or part of defined medical
expenses.
Sometimes your premium will just buy
cover for a particular period of time, at the end of which you have to
renew your policy. In other instances the premiums are regular and may
even have a savings/investment component built in.
Because the range of insurance on offer
is so wide, you should shop around before you purchase. First you should
find the policies on offer that cover the risks you need covered. Then you
should read the policy to make sure that there are no exclusions relating
to a particular risk you might face.
Also check that the benefits are in a
form that will be appropriate should the risk event occur. And lastly you
should look for the most cost effective of the products that would cover
your particular risk need.
This can be very complex, so most people
find it is very useful to purchase their insurance from an expert with
specialist knowledge in that.
Disclaimer:
The information contained above has been provided as a general
service. Any references to specific financial, legal, accounting, or
taxation issues are done so in the context of general information
and should not be relied upon as fact or construed as advice by the
us in any of these areas. You should consult a relevant financial,
legal, tax or accounting professional to assist in your particular
circumstance. |
