Mitigating Risk (Part 5)
Guest Blog courtesy of Ross Brown (Acorn To Oak Financial)Insurance to many people is a confusing and often highly
misunderstood topic. Most of us have been taught to think of it as a cost or a
necessary evil. Many families have not been counselled on how to utilize it effectively
as an integral part of Risk Management within their overall wealth building
process.
Over the years we have seen many financial plans that were
created from an accumulation and retirement planning philosophy, but in reality,
few are created with true Risk Management in mind. Too often these well
intended plans are created with static assumptions that look fantastic if
everything goes according to plan but fail miserably when adversity rears its
ugly head.
We need to think more like an engineer when we build our
financial lives: that our plan should work equally in both good times and in
bad. When an engineer builds a bridge, they do not just build it based on the
bare minimum requirements, they build in many contingencies that could impact
the integrity of the structure such as excess winds, additional load,
earthquakes etc. Our financial lives should be no different and insurance can
play an important role in this.
Let us start by looking at what types of risks could
potentially exist for you and your family throughout your lives and how they
could derail or significantly impede your future financial success.
In the first category there are events that we would
classify as Economic Risks such as Job Losses, Inflation, Stock Markets,
Interest Rates, Recessions, Pandemics, Tax Rates and Tax Laws. These are events
that you usually have no control over as an individual and the best way to protect
yourself from them is by having access to liquidity for both emergencies and
opportunities as the situations arise.
In the second category there are events that we classify as Insurable Risks such as Lawsuits, ID Theft, Disability, Death, Property Damage or
Loss, Health & Long-Term Care Costs. These are events that you are in
control of mitigating the risk in advance by securing insurance so that you and
your family are protected should any of these events occur.
Insurance is one of the most important financial instruments
available today in society. It gives us the ability to transfer certain risks
away from ourselves into a pool of many who agree to assist in the loss of any
individual member within that pool if a certain peril should occur. Insurance
is something we all want to own as it provides us with security and certainty.
So, what is Insurance? Well if you always keep this one
definition in mind, you will have a much stronger and resilient insurance
portfolio:
Insurance is the reimbursement for the FULL VALUE of any
item lost.
We should all use insurance effectively to protect our
wealth, income, and lives by looking at the “economic value” of them and then matching that
value to the proper level of insurance.
Let us give you a few examples.
·
If your home burned down in a fire, would you
want the insurance company to pay you the full value of the home or just enough
to build a smaller home to “meet your needs”?
·
If your car were stolen, would you want the full
value of the car to be replaced or would you want just enough money to buy a
smaller less expensive car that “meets your needs”?
·
If you became disabled and could not work, would
you want your full income replaced or just a lesser amount based on what “you
need to get by”?
·
If you were to die prematurely, would you want
your family to receive your full annual income, as if you were alive, or would
you want them to receive just what they “need to get by” and not a penny more?
We hope your answer to each of these questions was that you
would want the full replacement value, and not a lesser amount that represents
a perceived “need”. The most important point that we can try to get across is
that when we purchase insurance, we are buying a way of life that WILL
occur if one of those perils should happen.
Often we see people with substantially less coverage than
full replacement value and when asked why some of the answers we get are, “that
was all I wanted to spend” or “I have no idea but it sounded good at the time”
or “I don’t like insurance and I am trying to save money on the premiums”. But
when asked how much they would own if it were free most people would own the
maximum they could acquire.
The focus on an insurance buying decision should not be on
premium cost but should always be on obtaining full-replacement value coverage
first.
Many times, the decision has been made by seeking out the
cheapest policy (which often provides the fewest benefits, and hence the least
value), we should seek to insure for the full value of the asset, income or
life we are trying to protect. When discussing any form of insurance, first
imagine the peril occurring in your life, then select the coverage that will
make your life happy or complete if the event should actually occur.
Once that amount has been ascertained, then the cost and how
to pay for it comes into play. But never settle for less than what you would
want to have if the peril did occur.
Born in Edinburgh, Scotland Ross moved to Canada in 1996 and has over 20 years of experience in the financial
services and insurance industry.His expertise focuses on the efficient and effective accumulation and distribution
of wealth using insurance products. He specializes in assisting families, professionals and business owners with
solutions designed to protect, as well as enhance their income and wealth
throughout all stages of their lives, while ultimately passing it on as
efficiently as they’d prefer to their families, charities or religious
affiliations.
Working
regularly with other professional advisors he brings integrated and strategic
insurance solutions to meet a client’s unique circumstances, complementing
the excellent work delivered in the Wealth Management, Investment,
Legal and Accounting sectors of our industry.
He is actively involved in volunteering his time to the Barrie Scotch Whisky
Society and has also served as a Simcoe County board member for the Canadian
Association of Insurance and Financial Advisors.