Risk Management

You have a budget, working on pay off consumer debt, and listed your investment accumulation goals and objectives, now you have to worry about what happens if something goes wrong. Bad stuff happens and planning for the possibility in advance is vastly better than reacting to it after the fact. This is called risk management. We are going to discuss four different types of risk.

Emergency Fund
63% of employees are unable to cover a $500 emergency expense, according to a A recent survey from SecureSave found that 63% of employees could not cover a $500 emergency expenses. There are both valid and not valid reasons for this, but the reality is it is not good.

Your first risk management issue and this is also an accumulation objective is to set aside sufficient funds to cover an emergency. The goal should be $10,000-$15,000, but the faster you get to at least $500-$1,000, the better. The cash can be held in a bank or brokerage account and should be low risk [money market and/or short-term CD]. If you have an emergency, the ability to use saved cash rather than credit cards makes both the short-term and long-term financial more secure.

Health Insurance
The costs of health care is a primary risk management issue. Unfortunately, the cost of health care is very high in the US and the lack of quality health insurance in the US makes even adequate health insurance and health care difficult for many households. A recent survey found that over 60% of bankruptcies in the US are health care related.
Note: The per capital cost of heath care in the US is about $12,900. The next highest country is Germany at $7,383 per capita.

There are multiple variables in health insurance including deductible, coinsurance, health care events which are not covered by the insurance or have limited coverage and of course premiums or the cost of the insurance.

A detailed discussion is not possible in this section, however, each household should review their policy deductible, maximum out-of-pocket and maximum coverage and/or limitations in coverage. For employer sponsored high deductible plans, often the employer also offers a Health Savings Account HSA] which has both short-term and long-term benefits along with immediate tax benefits.

After reviewing their coverage, some households may wish to consider supplemental health insurance plans which have both pros and cons. However, if your personal health insurance is lacking, and many are, supplemental health insurance can be a viable option.

If you do not have health insurance, the Affordable Health Care Act [ACA] enables all citizens to obtain health insurance. Many states subsidize ACA plans so low-income households can obtain the coverage at an affordable rate.

As a risk management issue, health insurance is unique. Almost every one has health issues and costs at some point. Some early in life, some late in life, some throughout life. Without adequate health insurance, some households may have substantial health care expenses and as mentioned previously, this can lead to bankruptcy.

Health insurance is and should be a National issue, but for households, it is a personal risk management issue which can lead to personal fee unless properly insured.

Disability Insurance
Disability is a significant risk management for almost all workers. Research found 30% of workers age 35-65 are disabled for 90 days or longer. Ask yourself, if you had no income, how long would you be able to maintain your lifestyle. For those close to retirement, maybe throughout the rest of their lives by taking early retirement.

However, for most workers, a extended can lead to financial hardship and even bankruptcy.

Disability insurance includes these basic components. Elimination period, benefit period, definition of disability and the amount of the benefit. Many workers have group disability thru their employer which is the best option. But for those who do not, they may wish to consider individual policies. For certain professions, construction for example, the cost of a policy can be higher with less benefits than another profession such as accounting. Some professions who have group disability insurance may wish to add a supplemental policy for various reasons. If you do not have group disability, you may wish to consult with an expert in disability insurance.

Life Insurance
Though most if not all need at least a basic amount of life insurance during their working years for final expenses and to pay off debt in the event death. The biggest need for life insurance is when others are financially dependent on you. Financial dependents are most often minor children and spouse/partner or in many households the parent and one or more minors.

For households, the amount of life insurance need is calculated based on the amount of debt that needs to be paid off at death and along with the amount of income needed to maintain the lifestyle of the surviving family. There are financial analyses done by independent fee-only financial planners. The analysis will include all factors including social security benefits.

Finally most if not all households with financial dependents are best served buying low cost term insurance. For example, when the mortgage is paid off, you no longer need life insurance to cover this liability. Or, once the children have grown up and are no longer financial dependents the need to insure this risk has ended.

For some households later in life there may be other reasons to buy or hold life insurance, but as a risk management issue, the need often ends with debts and no financial dependents.

Long Term Care Insurance
Long-term care is primary risk management issue for retirees. A study by the U.S. Department of Health and Human Services, found about 70% of 65-year olds will need some type of long-term care in their lifetimes.

There are essentially four ways of paying for long-term care: Out-of pocket, long-term care insurance, a combination of out-of-pocket and insurance, and government programs.

Long-term care encompasses a wide range of services included home heath aid, assisted living, memory/long-term care facilities.

Many retirees simply do not have either income or assets to pay for long-term care insurance. For those, they will have to rely on personal assets including residence, family/friends, and government aid.

However, for those who have the income and wealth, long-term care insurance is an option as are hybrid life insurance/long-term care contracts or hybrid annuity/long-term care contracts. Long-term care insurance is a very complex issue and it is essential to work with an experienced expert in this field.

I would suggest pre-retirees consider and then decide if they wish to self-fund, fully insure or partially insure this risk. This decision should not be put off.

Property-Casualty
Most if not all households need one or more types of property/casualty insurance which is a continuing risk management issue. This is discussion does not cover the various needs or details but it is important. Households should work with a qualified property/casualty agent.