Everything in life has some risk, and what you have to actually learn to do is how to navigate it.
– Reid Hoffman
Merriam-Webster dictionary defines risk as the possibility that something bad or unpleasant (such as an injury or a loss) will happen.
Clearly Surely definition (yes, we are not shy at all) of insurance is a form of financial risk management.
Hence, insurance is merely one method of managing the possibility of bad things happening upon you.
The All-Important Question – is insurance the best way of managing personal financial risk ?
We shall explore this topic further.
Risk management is widely recognized as the process of identifying risks, then assessing them and finally taking action to address them.
Do you recall doing a Know-Your-Client/Financial Need Analysis/Fact Find Form when meeting up with your Financial Advisor ?
That is the equivalent of identifying and then assessing your personal financial risks.
What are the bad things that may happen to me ?
There are infinite number of not-good events that may realistically occur.
You may be jilted by your lover, kena summoned by Traffic warden or being jailed for 8 years.
But we are not too concerned over them today.
We are talking about the possibilities of death, illness and injury which may cause financial difficulties to you and/or your loved ones who is dependent on you.
Now that we have identified the risk involved. Let’s assess them.
We need to understand what are the consequences of these risks.
Only after realizing the severity of the consequences, then we can properly analyze them and take necessary measures.
We can assess it by asking ourselves some questions such as
– Will a long term injury or sickness wipe up my emergency fund and retirement savings ?
– Shall my death cause a huge lifestyle change to my dependent ? If yes, are they likely to be able to cope?
– How can my family survive if I am permanently disabled and unable to work anymore ?
Okay, how can we deal with these risks ?
There are 4 common ways to handle these risks and the US Department of Defense names them as ACAT – Avoid, Control, Accept, Transfer.
We shall dive into individual methods to find out which is suitable for personal financial management.
Risk avoidance is essentially an answer to most risk.
Don’t want to lose money via investment ? Simply save your money inside a milo tin.
Reluctant to trust someone with your heart ? Do not love anyone.
However, it does not work well here.
Death is inevitable; illness and injury are also unavoidable.
Apparently Mr Facebook agrees too.
The biggest risk is not taking any risk… In a world that changing really quickly, the only strategy that is guaranteed to fail is not taking risks.
– Mark Zuckerberg
Also known as risk reduction, it is a method that aims at reducing the likelihood and/or severity of the risk.
Companies install sophisticated anti-burglar system to keep thieves out and fire-detection sensor to mitigate fire damage.
It can also work here to some extent when you applies to your daily living.
Keep yourself safe, exercise regularly and doing proper warm up are some risk control methods that may help to contain the risks of death, illness and injury.
Usually when the cost of managing the risk is too high in comparison to the consequences of the risk itself, companies tend to accept the risk and deal with losses when it occurs.
For example, a small kiosk at a mall cannot afford multiple cameras to detect theft. It just have to live with the potential losses.
In this case, risk acceptance is okay if you have huge wads of cash in reserve to deal with contingencies of life.
Why insure yourself for a million when you have billions in your bank account.
Sadly for most of the population, this is unrealistic.
Aka risk sharing. Outsourcing is one commercial arrangement of a risk transfer.
You know what ? Insurance falls on this category too.
You can outsource your risks in full or partially when it comes to the financial effects.
Hospitalization bill ? Fear not ! You have enhanced shield plan with rider.
Loss of earning ? Personal Accident plan or Eldershield can help you lessen your monetary issues.
The best method is not available to all (acceptance) whereas avoidance is not possible.Risk control can reduce the chances but does little to mitigate the severity.
Therefore, insurance or risk transfer wins by default. Hurray ?
We assess insurance as the best risk management in the framework of traditional risk management.
In all honesty, personal risk management takes more than just insurance.
A pinch of financial literacy and a huge dollop of common sense may be much more useful towards the management of your financial risks.
Pause your busy life and take stock of your situation.
Review your risks and take steps.
You will find yourself more prepared and hence better rewarded for life’s challenges.
P.S. Told you that we are practically shameless.
www.ClearlySurely.com aims to eradicate the knowledge gap between consumers and Life Insurance. Our Vision is that one day, every Man, Woman, and Child will be properly insured.