 Everyone faces uncertainty in their lives. There are always blind curves on every well-chosen path, and the best-laid plans can be rendered irrelevant by any number of unexpected events in our lives. That is why a good financial plan anticipates what might go wrong and addresses those risks. Risk management doesn’t always mean buying insurance. Some risks can be mitigated (lessened) by changes we can make in our lives and circumstances. We can reduce the risk of heart and lung disease by not smoking, exercising regularly, and eating healthily. We can reduce the risk losing our homes and possessions to fire by installing smoke alarms and security systems, cleaning hazardous materials from our basements and garages, and keeping fire extinguishers handy. We can reduce the risk of an auto accident by being sure we don’t drive while impaired, keeping our vehicles properly maintained, and by not allowing ourselves to be distracted (cell phones, etc.) while driving.
But risk mitigation can go only so far. When we have done all that is reasonable to reduce the probability of something bad happening, we have to figure out how to deal with the risk that remains. To the extent that it is financially prudent, we may choose to “self-insure” some or all of this residual risk. We often do this by accepting certain levels of deductibles and co-insurance on our auto and homeowner’s insurance policies and elimination periods on our disability and long-term care insurance policies. Sometimes, if our financial resources are substantial, we may find ourselves able to entirely self-insure even substantial risks like those of premature death or long-term care. Decisions to self-insure, however, should be conscious ones and not made by default because the consequence of some kinds of losses can be so severe that, even with a very low probability of occurrence, most people are simply not in a position to assume certain risks.
That brings us to insurance. Insurance can be best understood as a communal pooling of risks that are too significant to be assumed by the individuals comprising the group. The insurance company serves as the intermediary that makes the risk-pooling possible. Not everyone in the pool will suffer a loss and some will suffer greater losses than others. But by pooling their risks and paying insurance premiums, people are able to exchange a large uncertainty (the possible loss) for a much smaller certainty (the insurance premium). When you purchase any kind of insurance you are, in effect, transferring a risk you have determined you cannot accept to another entity (the insurance company) that can.
Heling Associates does not sell insurance (or any other financial product, for that matter). What we do is, along with their own insurance advisors, to help people identify and evaluate the risks they face at different stages in their lives and to develop strategies for coping with these risks… strategies that include mitigation, self-insurance, and risk transfer. We then help them to implement risk transfer strategies by working with their own insurance agents to put the right kinds of policies in place. When they don’t have an agent to address a particular risk, or when they want to shop the risk around, we assist them with that process as well.
Personal risk management is a part of every comprehensive financial plan. And while insurance isn’t fun, it’s often a necessary financial tool.
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