What would you do if you or your spouse became sick or injured? How would you replace your property if it were damaged or stolen? How would you take care of your family financially if one spouse died? Most individuals obtain insurance to protect themselves, their family and the items of value they own.
Insurance is a contract with an insurance company that promises to pay for certain financial losses you suffer if you pay a premium. Making sure that you have the insurance you need and insurance you can survive without is the most difficult part about it choosing insurance. How much insurance to buy depends on how much your individual and family needs.
Purpose of Insurance
Insurance is purchased to protect against financial losses from a vanity of risks. What is Risk? Risk is the uncertainty, that you will incur a financial loss and uncertainty about the size of the financial loss. Insurance may not be necessary to cover all risks.
When it comes to managing risk, being able to identify and evaluate the risks you may face and determining the best way to handle them. For comparison, when it comes to investing you are dealing with speculative risks (the possibility of financial gain or loss), insurance covers pure risk (the possibility of a financial loss with no potential for financial gain.)
Before purchasing insurance, evaluate your situation to determine your risk. Secondly, consider what the possible financial loss would be if you experienced each risk and how often you may experience the risk. Third, determine the best strategy for managing each risk.
Risk Management Strategies
Avoid Risk
No matter how hard a person avoids risk, sometimes it is unavoidable. Risks are a part of life, we face the risk of illness, injury and death, however, some we choose and others we don’t.
Retain Risk
Retaining risk is accepting that if the financial loss occurs, you will have to cover the cost yourself. If the financial loss is small, can you retain the risk? Depends on if you are purchasing additional insurance for a cell phone or computer or changing insurance on your vehicle and will be responsible for replacing/repairing your car.
Control Loss/Reduce Risk
When you control loss or reduce risk, you take the necessary steps to reduce the frequency or size of a financial loss to affordable levels.
Reduce loss of theft – lock home and car
Reduce loss of serious injury – wear seatbelts and keep car in proper working order
Reduce loss of liability – keeping a backyard pool secured with gates and alarms
Reduce risks by transferring part of the financial loss to an insurance company. Insurance may cover all of your financial losses, however, most cases insurance will cover part and not all.
Transfer Risk
Transferring risk means you pay someone else to cover your financial loss. The most common way to transfer risk is to pay an insurance company. The fee that is paid is known as a premium. They agree to cover the financial loss. Your homeowner’s insurance agrees to cover for a financial loss that is covered by your policy such as a fire, theft or vandalism.
Purchasing insurance should be considered for the risk of loss being low and the financial loss would be high. Health, disability, life, homeowner’s (renter’s), automobile and liability each cover their own peril(s). Examine your risk and the different types of insurance to determine if you should transfer any or all of your risks to an insurance company. With the exception of the required insurances in Texas, such as automobile and homeowner’s. You determine amounts.