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The Role of Insurance in Your Financial Planning

Your financial strategy is just as good as its security. In what follows, I outline the major financial issues you may face during your entire life and how to appropriately manage these risks at the lowest possible cost.

Risk Management Fundamentals

Risk is the possibility of unplanned loss of something valuable. A risk management plan is a method of reducing the likelihood or severity of a prospective loss. 

There are four main risk management strategies

  • Avoidance
  • Reduction
  • Retention
  • Transference

Risks with a high loss severity, even if the risk of loss is small, are the most essential in terms of your financial strategy. 

If you face a significant financial loss, such as an untimely passing, long-term incapacity, costly lawsuit, or large property damage, your future plans may be compromised. Your goal should be to transfer these risks to an insurance agency and/or avoid them as much as feasible.

Humans and Financial Resources Risks

You only make a small part of the money you spend throughout the course of your lifetime. This implies that your ability to work, save, and safeguard those savings will be crucial to the success of your financial strategies for the future.

Your human capital, or potential earnings, is your biggest asset when you’re young. Your largest asset as you near retirement is your financial wealth. Important issues for risk management result from this.

The value of human and financial resources, as well as how heavily your future expenditure is reliant on it, will determine how serious each risk is. The level of loss related to each risk category will alter as your financial and human resources grow in size over time. 

This implies that your risk management plan will need to be modified over time, including what risks to pass on and which to maintain.

Consider the risks of high severity listed below:

Being unable to work after a premature death may make it difficult for your survivors to pay for their costs. When the value of your people is significant and your survivors’ spending depends on it, it makes financial sense to obtain life insurance. 

Ask for level life insurance with a term from a private insurance provider rather than spending money on pricey additional coverage offered by your employer. The ladder method multiple policies will help you keep costs down by lowering the death benefits and cost as you get older.

A long-term handicap may result in a protracted time of no or little income and greater costs, which may make it more difficult for you to pay your bills. 

Getting long-term disability insurance is a smart move, especially if you have a substantial human capital. Maximize your group insurance through employment and, if possible, pay premiums out of pocket to keep costs down. Apply for a secondary policy from a private insurance firm if you can’t or need more coverage. 

A catastrophic illness or health shock could result in high medical costs and an extended time of no or poor income. Finding a cost-effective insurance plan through your workplace, a state-run marketplace, or Medicare is a smart move. Select a plan with a low annual premium and combined out-of-pocket limit to keep costs down.

Your capacity to pay your bills may be hampered by the possibility of having deposits and some of your future earnings withheld as a result of a personal lawsuit. Especially when you’re close to or in retirement, it is sensible to purchase umbrella liability insurance in addition to your house and auto liability coverage. Maintain coverage of your net worth plus five years’ worth of earnings to keep prices down.

Property loss may put a burden on your ability to pay your bills because it may require a substantial financial investment for the reconstruction or substitution of real or personal property.

The price increases inversely to the property’s value. Securing homes  insurance that fully covers the replacement cost of your home and personal items is a prudent course of action. Increase your limits and reevaluate your coverage annually to keep prices down.


Making wise financial decisions about spending and saving depends on creating a financial strategy for the future. Your plan, however, is only as sound as it is secure. Determine the primary financial threats to your plan and, to the extent practicable, implement a successful risk management approach. 

Every year, consider whether your plan will withstand an event of a serious risk, such as early death, permanent disability, a life-threatening disease, a pricey legal action, or significant property damage.



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