As a person develops their overall financial plan, part of the focus will include risk management. You are all aware that we face countless risks every day: there is the risk of an automobile accident, the risk of incurring a disability, the risk of getting sick, and in the most extreme case, the risk of dying, just to name a few.
Whether or not you actively consider the chances that you take, there is a certain level of risk that you are willing to live with in the short and long term. In cases where you are not comfortable managing the risk, an insurance product can fill that void.
What insurance does for you is simple – it transfers risk. In exchange for a regular premium, insurance companies take on the risks that you will require long-term care, that you will die, that you will have an accident, and so on. This understanding of insurance should make the decision clearer of whether or not to invest in a policy.
If you choose not to buy a particular insurance policy, you are taking on a certain degree of risk.
Let’s use flood insurance as an example. Whether you live in a flood zone or a desert, if you do not buy flood insurance, you are basically saying, “If my property floods, I am shouldering the risk of repairing any damage.”
However, if you purchase an insurance policy that includes flood coverage, you successfully reduce your risk level by transferring the risk to an insurance company. By purchasing a policy that covers flooding, you are now saying, “If my property floods, I am prepared and my savings will not be destroyed by a flood. The insurance company is taking on the risk of flood-related damage.”
Now, let’s use an example for life insurance. Life insurance protects the risk of someone dying. Let’s say you are the primary income earner in your family of four, which is made up of you, your spouse, and two children. Some other information: your household relies on your income for day-to-day cash flow needs, you have no retirement plan, no pension, and you add to your children’s 529 Plans every year.
In this case, a lack of a life insurance policy would say, “If I die, my family will be responsible for all future income needs, and my children will use what is existing in the college funds for their tuition costs.” Let’s say you own a life insurance policy to cover all sources, your current situation would be: “If I die, my life insurance death benefit will provide 3 years of income for my family, provide a small nest egg for my spouse to invest for retirement, and cover all college tuition for the children.”
This is just one conceptual example of how life insurance could be used. Life insurance can also be used as a piece of your “asset allocation pie,” to fund a trust, business succession planning, and much more. For an insight on how much life insurance you could need, see my next blog post in the Life Insurance Series.
Kelsey Dolfi, CPA. RiverStone Private Wealth Advisors, 7 Livingston St. Rhinebeck, NY 12572. 845-516-4440. email@example.com Securities offered through Commonwealth Financial Network, Member FINRA/SIPC.