The goal of risk management is to help you protect your wealth from risks such as death, serious illness, income loss, property damage, and theft. Following these four steps can help you decide how to manage the risks in your life: Identify and measure all possible risks. Select a risk management technique for each risk. It would be very expensive to insure for every risk you are subject to, so you may decide to use other strategies for some risks. The primary ways to manage risk include: Avoid the risk. Reduce the risk. Retain the risk. Transfer the risk. Implement your chosen risk management techniques. Review your risk management program periodically.
Be aware of items that must be specially insured, such as jewelry, coin collections, antiques, works of art, etc. Also inventory your activities for possible sources of uninsured liability, which could include incidental business activities or rental property management.
here are some risks that insurance companies won't insure or that are very expensive to insure. Thus, your best strategy may be to simply avoid the risk. Some examples would include not building a home near a flood plain, not participating in dangerous sports, and not smoking.
In many cases, you can reduce the possibility of loss through active steps on your part. For example, you can start exercising, install an alarm system, or wear seat belts.
When the cost of insuring the risk exceeds the benefits you would receive, your best option may be to retain the risk. For example, you might not want to purchase extended warranty insurance on small appliances. The use of deductibles and co-insurance are also forms of retaining risk.
Typically, this involves purchasing insurance and is used for major risks that can't be eliminated through risk reduction or avoidance. You should consider insuring all potentially severe losses, such as death, disability, catastrophic health care costs, major property loss, and personal liability suits.
When examining your risks, consider retaining those with small economic costs while transferring those with large economic costs. Your decision should be based on the amount of the possible loss, not your perception of how likely the event is to occur.
For example, many people fail to obtain disability income insurance because they think there is little risk that they will become disabled. Yet a long-term disability can be financially devastating, making it prudent to insure against this risk.
Once you decide how to deal with each risk, follow through and implement those techniques.
Changes in your personal situation may make it necessary to change how you handle certain risks. For instance, when you are single, you may have little need for life insurance since no one is dependent on your earnings. But once you start a family, life insurance may become very important.
