Are You Over-Insured?

Are You Over-Insured?

Have you ever felt like you were over-insured? No one wants to waste money on unnecessary insurance premiums because every dollar wasted is a dollar that could have been invested or spent on something a lot more exciting than insurance. On the other hand, not having the right types or amounts of insurance can be very detrimental to wealth building and enjoyment of life. How can we find the proper balance? The key is to cover only the potentially catastrophic risks we cannot completely avoid. The following types of insurance cover risks in that category: Auto Insurance Homeowners Insurance Umbrella Liability Insurance Medical Insurance Long Term Disability Insurance Long Term Care Insurance Life Insurance These types of insurance are critical because uninsured losses we may experience in these areas have the potential to financially devastate us. For example, if we carried only the minimum required auto insurance liability limits and seriously injured or killed someone in a car accident, how would we pay for the vehicle damage, medical expenses, and income loss of the other driver, which could add up to hundreds of thousands, even millions of dollars? How could we pay medical bills for unexpected cancer treatments, surgeries, and long-term hospital confinement if we had no medical insurance? Many years ago I met a man in his fifties who had incurred hundreds of thousands of dollars in medical bills twenty years earlier because his wife had developed a serious illness at a time when they had no medical insurance. She eventually recovered physically, but he told me he does not think they will ever fully recover financially from...
Four Ways to Manage Risk

Four Ways to Manage Risk

Every risk we face can be addressed in one of four ways. Each may be an appropriate choice, depending on the circumstances and type of risk in question: Avoidance Reduction Transfer Retention Avoiding Risk The surest way to prevent the potential loss arising from a certain activity is to completely avoid it. For example, if I want to avoid the possibility of having to pay for a stranger’s medical expenses due to an auto accident, I could stop driving a car. So why not just avoid all risks? The problem is that whenever we avoid a risk we also miss out on the benefits we could have received for participating in the associated activity. In addition, not all risks can be completely avoided, such as the risks of illness or natural disaster. Avoidance may be appropriate for a limited number of risks that produce a high probability of loss, such as gambling, but it is not a practical solution for most risks. In some cases we may even create additional risks by trying to avoid a particular risk. For example, we may be tempted to keep all of our savings in cash to avoid the risk of investment losses, but then we would be subjecting ourselves to the potential risk of loss by inflation, which is practically guaranteed to significantly erode the value of our cash over time. Reducing Risk  If we are unable or unwilling to avoid an activity, we can take steps to reduce the probability and potential severity of loss associated with the activity. For example, when we choose to drive, we can reduce the risk...