PERSONAL RISK MANAGEMENT
Insurance is one of several methods the risk manager can use to treat loss exposures. Risk management provides for the periodic evaluation of all techniques for meeting losses, not just insurance. Major personal risks include the following
- Death or total disability of one or both parents and the subsequent loss of tuition support
- Possible injury while skiing or surfing catastrophic medical bills and loss of income if person becomes seriously ill or totally disabled.
- Involuntary loss of part-time job and a subsequent reduction in total income.
Personal Risk management can be defined as the identification of pure risks laced by an individual or family, and to the selection of the most appropriate technique for treating such risks
A well-constructed financial plan has two parts wealth creation and wealth preservation. Wealth creation is designed to build and preserve capital based on the assumption that person will have continued good health and live to a certain age. However, wealth preservation is transferring the risk to another party in the event that something may happen that will prevent the person from meeting his long-term financial and lifestyle objectives. Wealth preservation is known as risk insurance and is concerned with assessing the individual’s financial circumstances and ensuring that his assets and resources are protected. Risk insurance is a simple means of transferring risks from individuals who cannot afford to retain the risks, to insurers who can.
Risk insurance management is important to relieve the person and his/her family of the financial burdens associated with the loss of income if an event occurs such as death or permanent/ temporary disablement. It provides peace of mind that the person and his/her family are financially secure by providing an ongoing income source, debt repayment, a replacement housekeeper/ nanny while his children are young, and possible funds to meet his children’s future education needs. Given the complex nature of risk management, professional assistance should be enlisted to ensure that the correct type and amount of insurance is established. The type and amount of risk insurance will depend upon individual’s personal financial circumstances and objectives, lifestyle needs, number of dependents and his/her age.
Personal risk management helps to identify and manage uncertainties that could affect achievement of our personal objectives. At the highest level we might say that our aim is to be “happy, healthy, wealthy and wise”, and we can identify and manage strategic personal risks which might affect these broad goals. This might require us to address big issues such as our key personal relationships, diet and exercise regime, or investment and pension policies.
Our personal risk management strategy may have a major impact on our family’s financial bottom line. Cutting losses at the right time can save our family thousands of rupees. If we are an active and involved family, or expose our self to a risky opportunity such as leading a youth or sports group we may want to consider this in the amount and type of personal liability insurance we carry.
If our financial goals include planning for our future and investments of any kind, then risk management should be a key part of our overall strategy. As we build an investment portfolio insurance and risk management should be a major consideration. For example, investing in rental property can be a very stable, relatively low risk investment. Deciding how much insurance and what type of coverage we need includes the consideration of all of our investments.
When we have identified a risk our family faces, we need to decide how we will deal with the worst-case scenario. When deciding what and how much to insure, it’s is the duty of the person to identify the personal risks he is exposed and how much he can or are willing to pay if the worst thing happened.
Personal risk management process
Identification of risks
The process is exactly the same as any other application of risk management. After defining objectives, the next step is to identify risks, including both threats which could hinder us as well as opportunities which could help us.
After risk identification the next step is assessment that is estimating the probability and impact of each identified risk to prioritize them for further action. Simple “high/medium/ low scales can be used for this, enabling the worst threats and best opportunities to be found.
Assessment is to be followed by response development, finding appropriate and effective actions to minimize threats and maximize opportunities. Some of these might be simple (talk to boss or colleagues about possible internal openings: research available training courses), and others may require more effort and investment (obtain coaching to explore my deep-seated personal goals: join professional association to improve networking.
Implementation and monitoring
Finally, identified responses need to be implemented, and their effect should be monitored, to see whether they are moving us towards our objective. Where necessary, we should develop new responses, remaining alert to the possibility of secondary risks. And our risk assessment should be updated regularly to find and respond to new threats and opportunities.
A personal risk management strategy should ensure that assets are protected and debts are cleared in the event of the unforeseen death, major accident or major illness of a key financial member(s) of a family or partnership. This entails personal protection insurance. In much the same way as one would insure a home or car, one should insure for the protection of income, accumulated wealth and lifestyle.
There are four key forms of personal protection insurances:
- Life (Term) Insurance – pays a lump sum upon the death of the life insured.
- Total & Permanent Disability (TPD) Insurance – pays a lump sum upon the total & permanent disablement (as defined by the contract) of the life insured.
- Trauma (Critical Illness) Insurance –pays a lump sum in the event of a major injury or illness (as defined by the contract) of the life insured.
- Income Protection Insurance – pays a pre- determined monthly benefit for a pre-determined period of time in the event of an injury or illness, which prevents the life insured from working. The definition of working’, as in working in the previous Occupation or in some other occupation, is defined by the life office.
Life Insurance (often called Term Insurance) pays a lump sum benefit to the policy owner upon the death of the life insured, where this occurs during the term of the insurance cover (this can be up to age 99). Term insurance is usually taken out in order to repay liabilities, such as mortgage, credit cards, etc., cover funeral costs, pay off credit cards and, in the event of the death of the main breadwinner, provide a substitute income stream for the spouse so that the current standard of living may be maintained. This is especially important where dependent children are involved.
Total & Permanent Disability (TPD) Insurance
TPD insurance provides a lump sum upon medical confirmation that the insured person is totally and permanently disabled based on the definition provided in the policy document. This type of policy is generally sold as an additional benefit to term life insurance.
It is important to be clear about how the life insurance company defines the total and permanent disability in the context of you being able to continue to work in your current capacity. This definition will assist in the selection of particular products for recommendation. Generally, in order to claim on TPD, you must be off work for at least six months and, in the opinion of the medical practitioners, unlikely to ever work again; or have irrecoverably lost the use of both eyes, legs, arms or one of each.
Trauma (Critical Illness) Insurance
Modern medicine can keep more people alive following major traumas. Trauma insurance pays you a lump sum in the event of a major trauma such as a major heart attack, cancer or stroke. Most life offices also pay the benefit under trauma in the event of death. Statistics show that we will suffer some major illness or trauma during our lifetime and that we are three times more likely to suffer a condition such as heart attack, cancer, and stroke or bypass surgery than to die.
Most of us will survive the trauma but many are not able to continue working. In that case their income stream, upon which they rely for their livelihood, ceases. Trauma insurance is designed to ensure that lifestyle suffers as little as possible by paying at and when the need is highest therefore aiding recovery.
Income Protection Insurance
Most people state that their greatest physical asset is their home. They see the importance of insuring their home building and contents but most overlook their most valuable asset, their income. Your ability to earn an income between now and retirement determines what you and your family are able to do day-to-day. Income Protection cover is designed to provide you with a regular monthly income whilst you cannot work due to sickness or accident. You are able to protect up to 75% of your gross income, inclusive of any packaged benefits such as car and superannuation.