Risk Management and Insurance Planning
How to use insurance to manage risk.
Shrewsbury Financial Collaborative
Table of content
Risk Management
There are four types of risks with four strategies for handling them:
- Low cost, low probability risks:
Risk Retention treats the risk as a normal expense and makes it a part of the household budget, usually by setting aside money in a contingency fund. - Low cost, high probability risks:
Risk Reduction seeks to reduce the chance that a loss will occur or reduce the magnitude of a loss. - High cost, low probability risks:
Risk Transfer uses insurance to transfer the financial risk to some other party. - High cost, high probability risks:
Risk Avoidance means choosing to not take on the risk at all.
Some high cost, high probability risks are unavoidable, such as retirement forced by no longer being able to work or needing long-term care due to the frailty of extreme old age. These risks must also be addressed through Risk Retention with either planned savings or relying on the generosity of others.
Insurance planning is concerned with the risks that can be mitigated using Risk Transfer.
The Details
Car Insurance covers liability for damages to others when operating a motor vehicle. It can also cover damage to one's own vehicle.
Homeowners Insurance covers liability for damages to others while on your property and in many other cases with some exceptions (such as incidents covered by auto insurance.) It also covers damage to the property itself and one's personal items.
Renters Insurance covers liability for damages to others while at the property and in many other cases with some exceptions (such as incidents covered by auto insurance.) It also covers loss or damage to one's personal items.
Umbrella Liability Insurance covers liability for damages to others above and beyond what is covered by auto, homeowners, and renters insurance policies.
Health Insurance protects against the potentially high cost of health care.
Disability Income Insurance replaces lost income due to being unable to work.
Long-term Care Insurance provides benefits when assistance is needed with the activities of daily living.
Life Insurance provides protection against financial difficulties caused by an untimely death.