Happy Halloween everybody! I hope this finds you well. Thanksgiving and the holidays are right around the corner!
This month’s personal financial area of interest I’m going to cover is risk management. For those of you that have been reading this column there are five facets of personal finance – cash flow management (or budgeting), investment management, tax management, risk management (insurance), and estate planning. Today I’m writing about risk management.
Risk management, from a personal finance point of view, protects yourself and assets from loss. Major assets and attributes people have include your health, income, car, house, personal property, and your life. In all of these areas, you can protect yourself through the purchase of insurance.
In broad terms insurance makes the most sense from a financial point of view when the purchaser cannot withstand the loss of these assets without major financial setback. Typically, insurance is broken down into two broad general areas – 1. life and health insurance and 2. property and casualty insurance. It’s important to understand the agent or agency may not be licensed in both areas.
Many times, people purchase insurance without truly understanding why, what it covers, and the risk they are trying to protect themselves from occurring. For example, Frederick County is subject to sinkholes so it makes sense to read your homeowners insurance policy (and to ask your agent) if the policy protects from sinkholes. Everyday consumers are now being bombarded with all sorts of extended warranty offers, even when buying a very low-cost item. Often the risk/reward tradeoff is not worth the cost. Be sure to check the details carefully!
Last month I teased about a real life horror stories. I know of an individual who retired to Florida, paid cash for his home, and a sinkhole swallowed his house. He and his wife were fine. The home was a total loss. His homeowner’s policy did not cover sinkholes. They are now living in an RV trying to rebuild their lifes.
So pull out those old policies and understand the risk you are actually insuring against. Oftentimes you’ll find a mismatch of coverage and a policy change is in order.
NEXT MONTH – putting it all together – where to start??