Risk management is an important aspect of financial planning. Risk management is the process of identifying potential risks, assessing their impact, protecting against any probable losses, and minimizing the occurrence of other risks. Risk management is critical for personal financial management because it allows an individual to plan for any perils that may occur at any stage of life. As people grow through different stages of life, their financial needs and obligations change from time to time. For example when one marries, their obligations increase since they have to take care of a lager family. However, the financial state of a person does not necessarily become better as they move from one stage of life to the other. Therefore, it is important to plan for any potential risks through insurance (Easey, 2014). Insurance varies in its significance based on the stage of life that one is at any particular time. Besides, there are numerous insurance policies from different providers suited for specific aspects of life.
People are exposed to different risks in their daily lives. For example, an individual can suffer business losses, theft, or any damage to their property or health, which may ultimately affect their financial position. A proper risk management plan can go a long way in mitigating against these and other risks or unforeseen events (Easey, 2014). One of the most common ways of managing personal finances is through purchasing insurance. Essentially, insurance providers protect individuals by compensating them and restoring them to their financial position after they suffer loses. The compensation is based on the contractual agreement between the insurer and the individual who purchases the policy.
Risk management is particularly important because it helps someone overcome the impact of any financial risk. Therefore, risk management allows for one to plan for their finances without fear of whatever may happen in the future (Easey, 2014). Risk management adds some certainty in financial planning. In addition, risk management lets a person avoid failure, loss, or any significant damage to their health, property, and any other valuable item that may consume financial resources.
There are two main types of risks that can affect a person’s financial resources adversely. These are speculative and pure risks. Speculative risks are those that can result in losses or gains. These are usually based on speculation, which makes it difficult to insure against them. thus, the most reasonable approach for managing this kind of risk is avoiding it by keeping off any event that can lead to such a risk (Baranoff, Brockett, & Kahane, 2013). On the other hand, pure risks are those that are associated with accidental events. As such pure risks occur by chance and can significantly affect the financial state of an individual. Conversely, pure risks can be calculated and insured against to protect one’s financial position (Easey, 2014). Therefore, it is recommended that an individual purchases an insurance policy to manage these types of risks. The process insurance works by transferring the potential of pure rusks to other components such as the insurance providers.
Insurance coverage for property and vehicles helps the owners to keep the ownership of these items intact regardless of any type of risk that is likely to occur in the future. For the most part, insurance coverage for these items protects against damage, or loss through theft or other means. Insurance coverage for property protects against any damage or loss to homes as well as any other domestic items such as furniture, electronics, and other highly valuable products in the home (Baranoff, Brockett, & Kahane, 2013). In some instances, landlords can insure their tenants as part of their property insurance coverage. On the other hand, insurance coverage for vehicles protects against any damage or loss to motor vehicles. This may include protection against road accidents or any other damage to the vehicles.
Other important types of insurance coverage important for personal financial management include health, life, and disability insurance. Health insurance protects against ill health and its impact on making a person unproductive financially. This covers for the costs of treatment for both outpatient and inpatient treatment for the covered persons. Life insurance, on the other hand, protects the dependents of a person from suffering financial loses in the event that the person dies. Different options for life insurance include term and permanent insurance covers. Term insurance is meant for a temporary duration with a specified period of time known as the term. On the other hand, permanent coverage provides a lifelong protection to the individual (Baranoff, Brockett, & Kahane, 2013). Disability insurance covers a disabled person for the duration when they are unable to work due to their disabilities. There are two main options for disability insurance. These are short term and long term disability policies. Short term disability (STD) has a waiting period of not more than two weeks with a maximum benefit period not extending beyond two years. On the other hand, long term disability (LTD) has a waiting period ranging between several weeks to a few months while it has an indefinite benefit period that may be a lifetime cover.
Proceeds from insurance have varied tax implications. For example, life insurance proceeds do not attract taxation, unless in some rare situations. This would be when the proceeds are included as part of an estate (Easey, 2014). Similarly proceeds from long term disability insurance are also exempted from tax.
Therefore, based on the understanding of insurance and risk management discussed above, it is important to incorporate these elements into one’s financial plan. Consequently, when evaluating one’s insurance needs, it is important to analyze the short term, intermediate and long term needs. For example, for short term insurance needs, an individual can consider getting vehicle, property, and health insurance. On the other hand, intermediate insurance needs may include focusing on life insurance. Finally, long term needs will mainly focus on getting better rates and insurance policies for life, health, and property.