Life is full of risk and insurance is an instrument to transfer the risk to the insurer. Honestly, insurance is something that most purchasers wish they do not need to claim.
Why do we need insurance?
Insurance will compensate us for our loss if the insured event occurs. Without insurance, we have to bear the loss on our own. However, not every risk can be insured as there are certain criteria for a risk to be insurable.
For personal finance, there are three types of risk, which are personal, property and liability. To deal with these risks, there are two ways: risk retention (self-insurance) and risk transfer. Risk retention is the default option when there is no insurance.
Some risks can be retained (meaning self-insured) but some risks, due to its catastrophic nature, must be transferred to avoid financial ruin if they transpire. We can transfer every insurable risk if we want to, but the cost will be prohibitive.
Types of risk
1. Personal risk
Personal risks are directly related to an individual and involve the entire loss or decrease of earned income, additional expenses being incurred and the liquidation of accumulated property.
The insurance to tackle these risks include life insurance, critical illness insurance, medical insurance and others.
2. Property risk
Property risk exposures arise out of the ownership of property and such exposures can be direct or indirect in nature.
Examples include homeowner insurance and motor insurance.
3. Liability risk
A person can be held liable for some wrongdoings that resulted in harming a third party bodily or his reputation or his property.
Examples of liability insurance are professional liability insurance and general liability insurance.
Steps in insurance planning
1. Setting risk management objectives.
2. Gather information for risk identification and evaluation.
3. Analyse information to identify and evaluate risk.
4. Develop risk management plan.
5. Implement risk management plan.
6. Review, monitor, and revise risk management plan.
How can a financial planner help you?
I will evaluate your situation and analyse your insurance needs. I will then advise on which insurance is the priority. As we have finite resources, it is impossible to cover for everything. I will help you to select the most important insurance to buy. As I do not have a FAR licence, I will refer you to my colleague if you have an insurance need.
Your resources can then be directed to other aspects of your finances such as investment. Once in a while, I will review your insurance plans as your circumstances might have changed. You can also proactively reach out to me whenever there are major changes in life such as marriage and the birth of a child to see if any adjustment is needed in your risk management plan.
If you are interested in working with me to manage your risks, just leave your details by clicking the button below. I will reach out to you and see if we would be a good fit for each other.
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Disclaimer: This post is for informational purpose only. You should use judgment and conduct due diligence before taking any action or implementing any plan suggested or recommended in this article.