Managing risk with insurance. Part 1

What is risk management?

Risk management.  A lot of what it takes to be financially successful comes not only from making a lot of money, but also from managing the risks associated with different types of investments as well as risks that are just a part of life itself.

Managing risks that come with investments often comes down to diversification of assets, gaining knowledge about investments, and even having a good “gut check” whenever you want to try something new.

Managing risks that come with life is often done through insurance products.  Have you ever thought of health insurance as a form of risk management for your personal finances?  It is since if you are sick then you have two financial problems – one is possibly being unable to work and the other is the cost that comes with medical services.

Image courtesy of openclipart.org

Image courtesy of openclipart.org

There are many types of insurance products and several times as many insurance sales people out there wanting to get you to buy one through them.  Do you need cancer insurance or is your regular health insurance good enough?  What about whole life insurance versus term life insurance?  While I don’t have all the answers for your particular situation, I’ll take this post and the next two to explain the types of insurance policies I carry for my family.  

Health insurance

Even though health insurance is required now by the Affordable Care Act, it is still a no-brainer to have coverage.  Medical debt is the top cause of bankruptcy in America and one catastrophic health event (auto accident, cancer diagnosis) can destroy your finances overnight two-fold: loss of income and expensive care. 

Prior to ACA, if I were self-employed or did not have employer-provided health insurance I would have opted for a Health Savings Account or a plan with a really high deductible and lower annual premiums since I am in very good health.  Today, my husband and I have separate policies through our own employers.  Our children are dependents on my policy since it is cheaper and a better policy than my husband’s.

I'd also include dental insurance here.  I don't see it as a "must-have", but a nice-to-have. Your employer may have a policy with a premium that is at no or low-cost to you.  If not and biannual cleanings and exams will probably run you $200 to $300 out-of-pocket, then you may not need the insurance since you can pay out of pocket and possibly pay less than the premium.  If your teeth aren't in great shape, then you should consider getting a policy.

We do NOT have “extra” health insurance policies like one for cancer.  Our current policies cover expenses due to cancer so there is no need for us to purchase another policy just for this illness.

*I’m pretty sure these plans are no longer available since the government has decided that people like me with no debt, substantial assets, and good health don’t really exist and we need more expensive policies.

Long-term disability

What would happen if you were disabled and could no longer work?  Or perhaps you can work but not in the field you are trained for?  How long could you survive on your savings or what kind of lifestyle changes would you have to make if you could only find a job paying half (or even less) of what you used to make?  Long-term disability insurance is designed to replace a large portion of your income in the event you can no longer work.

Some employer’s offer a policy, and may even pay the cost of the policy as mine does.  I looked up a quote on Zander Insurance for a 35 year-old, never-smoked female working in a low-risk occupation at $60,000 a year and replacement income of $3,400 a month to age 65 would require an annual premium of $865.  That isn’t exactly a cheap policy, but it is one that will take care of you and your family in the event that some crappy and unexpected event happens.  I have two relatives who are currently using their long-term disability policy because they developed health conditions preventing them from working – it happens more often than you might think.

My employer provides a short-term disability policy for all full-time employees, but I personally would not purchase one if they didn’t provide it.  My emergency fund is effectively a short-term disability policy that I have provided for my family.  I am “self-insured” in the event that I can’t work for a brief period of time.

Up next...

Stay-tuned for Parts 2 and 3 to read about four more insurance policies I carry and the percent of our monthly budget they comprise.