How Insurance Covers the Costs of Risk
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How Insurance Covers the Costs of Risk
Managing financial risk is important to successful financial planning. Financial risk comes in many forms … and is sometimes not recognizable as financial risk. Sure, the first thing one thinks about regarding financial risk is losing money on an investment. But financial risk goes way beyond that. If an injury causes you to lose income, that is a financial risk. If you lose a lawsuit and have monetary damages against you, that is a financial risk. If a family "bread winner" dies or becomes disabled, that is a financial risk. Anything "unexpected" that has an adverse effect on your financial goals is financial risk.
Things To Know
- People have used insurance as a means to help manage financial risk.
- Special forms of insurance are available to cover almost any other financial risks.
How you manage risk is a financial planning concern of major importance. For hundreds of years, people have used insurance as a means to help manage financial risk. You need to consider financial risk and the ways to handle it and how to avoid financial disaster.
The role of risk
Regardless of the risk, one can determine the mathematical probability of it occurring and the financial risk at stake. Anyone who owns an automobile knows that he or she is required to have automobile insurance to cover the risk of damage to someone else’s property. With many years of statistics on automobile damage costs, insurers are able to determine the amount of premium necessary to provide benefits to insure automobile owners. Using the same principles, one can buy insurance to minimize financial loss due to accident, natural disaster, legal liability, illness, disability, and even death.
Insurance is a tool used to help manage financial risk. Financial risk can take many forms. There are risks to our investments, liabilities for our actions, and risks to our ability to earn income. There is insurance to manage all these risks. We encourage you to read articles on specific types of insurance to get in-depth coverage of each specific kind.
Special forms of insurance are available to cover almost any other financial risks. For example, there is unemployment insurance, investment insurance, and dismemberment insurance (for loss of a body part). Some high-fashion models are even insured against loss of income due to loss of their good looks. Premiums for such insurance are also based upon the likelihood of an event occurring and the amount of benefits to be paid.
