Feature Articles: Insurance This file is available as a pdf file
Managing Family Financial Risk
Brenda Procter, M.S., State Specialist & Instructor Personal Financial Planning, University of Missouri Extension
No amount of money can totally protect a family from
the risks that come with being alive. We deal with
risks, both large and small, every day. Their financial
impact can be devastating. Fortunately, risk can be
managed through a variety of techniques.
What is a risk? A risk is a condition where there is
a possibility of an adverse deviation from a desired
outcome you expect or hope for. In simpler terms, things
can go wrong. A risk can be as minor as the risk that
your three-year-old will throw her new shoes in the
trash or as major as the risk that you will cause a car
accident where someone is hurt or killed.
Insurance is one way to protect your family's
financial interests in the face of risk. With insurance,
you are "financing" the risk of a large loss by paying
premiums to an insurer, who will cover your loss if the
insured event takes place--like fire, natural disasters,
accidents and disability. Through insurance, you are
transferring your risk to someone else, for a price.
There are other ways to control or finance risks.
They are not mutually exclusive, and they can be used in
addition to insurance. You can control your exposure to
risk by avoiding or reducing it; and you
can finance all or part of the risk by retaining
it (keeping enough money in savings to cover the
financial impact of whatever might happen).
For example, you could totally avoid driving
and face no risk of a car accident at all. It might make
more sense, though, to reduce driving risks by
wearing seat belts, driving safely, not drinking alcohol
before driving and keeping your car in good repair.
You would still transfer a large part of the
risk of driving by buying auto insurance to protect
yourself financially in case you injure or kill yourself
or someone else, damage someone's property or need major
repairs to your own car.
You can retain the risks that are not very
likely to happen, and that wouldn't be that hard to
cover if they did. You can generally keep enough money
in the bank to cover things like a toddler's "tossed
shoes" or broken dishes.
Well-chosen insurance coverage is a good (and often
overlooked) way to protect your family's financial
future - especially when it works together with the
other risk management strategies.
Try to keep a reasonable balance between the
out-of-pocket costs and the potential benefits of any
insurance product. Going deeply into debt to pay
insurance premiums does little to protect your family's
overall financial health.
To choose your best mix of risk management tools,
think about the risks you face and how severe each event
would be if it happened. Consider transferring
risk through insurance coverage for things that rarely
happen to any one person, but are catastrophic when they
do - like home fires, automobile accidents, liability
lawsuits, disability, or death. Avoid and
reduce the risks you can through your own behavior,
even those for which you are insured. Keep a little
money in savings to retain smaller risks.
Then hope for the best, and enjoy yourself. You've
done the best you can to prepare and protect your family
for the worst.
For informational brochures on a variety of insurance
topics, see
http://insurance.mo.gov/.
Sources:
Israelsen, C. Consumer and Family Economics 183,
Personal and Family Finance, Winter 2003 Class Lectures,
University of Missouri, Columbia, Missouri.
Israelsen, C. & Weagley, R. Personal and Family Finance
Workbook, 3rd ed., 2002, Kendall/Hunt Publishing Co.,
Dubuque, Iowa.
If you'd like to learn more about this and other personal finance topics, the University of Missouri offers 'Personal & Family Finance' a correspondence course, through the Center for Distance and Independent Study (800-609-3727). Information about this course is available at http://cdis.missouri.edu/CourseInfo/DetailCourseInfo.asp?1985.
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Last update: Saturday, March 29, 2008
