One of the primary reasons for comprehensive financial planning is protection from financial risk. I don’t know many people who like to talk about insurance; but the truth is that without insurance financial resources are unprotected. Even with the discipline of setting financial goals, increasing net worth, having a properly diversified portfolio and carefully managed finances, one can be wiped out by an unforeseen event.
Every day, dreams are derailed by catastrophes such as: fire, flood, earthquake, theft, illness, injury, lawsuit, and even death. They all happen, and they bring the potential for a second catastrophe – a financial one.
If a life event would constitute a major financial loss, then you have got to figure out a way to manage that risk before it becomes a reality. Therefore, financial professionals often refer to insurance as risk management.
Here are five ways to manage risk:
1. Avoid risk – If you refuse to get on an airplane, you probably will not die of an airplane crash; but you will die, eventually. Unfortunately, total risk avoidance is impractical, if not impossible.
2. Accept risk – Some risks are retained because they cannot be insured or reduced. A loss due to war is an example of an uninsurable event. Other risks are retained by choice because they are too costly to insure relative to the benefit. Self-insurance funds and high deductibles are examples of risk retention.
3. Reduce risk – Risk can often be reduced with preventive measures, such as fire extinguishers and smoke detectors.
4. Transfer risk – Obtaining insurance is the most common means of transferring risk.
5. Sharing Risk – This is essentially a combination of accepting risk and transferring risk.
Risk management is fundamental to comprehensive financial planning. It reduces exposure to financial risk and attempts to protect you and your loved ones against the unexpected. Without adequate protection and precautions you and your family may be in jeopardy financially. Have you determined how you will manage financial risk? Contact a financial professional to help you create a personalized plan.
For more information contact Rebecca Robins, CPA/PFS, CFP®, at 661-702-9680. The office is located at 25001 The Old Road in Stevenson Ranch. CA Insurance Lic#0D75745.
Securities offered through H.D. Vest Investment ServicesSM, Advisory Services offered through HD Vest Advisory ServicesSM, a non-bank subsidiary of Wells Fargo & Company, Member SIPC, 6333 North State Highway 161, Fourth Floor, Irving, TX 75038 1-972-870-6000