Financial risk is something we’ve covered at length – you might, for instance, have read about the four dimensional risk profiling technique, which takes into account the dynamic nature of risk management. That article, like many others on the topic of risk, starts from the assumption that it’s often difficult to assess risk, since it depends on so many outlying factors, most of which are subject to change throughout time. And as numerous authors have suggested, a poorly articulated risk profile could become outdated far faster than you initially thought out. Today’s post looks into yet another articulation of financial risk: that exerted upon one’s personal finances.
Ideally, we all set out in life with a number of goals and dreams, toward which we work and build on. However, there can be no talk of personal finance risk management until we understand that, often enough, life gets in the way and throws a proverbial monkey wrench in our plans. What is there to be done? Be as prepared as possible, since you can’t really prevent or expect the unexpected. You can, however, understand what the variables of that ‘unexpected’ might be.
Is life insurance the answer?
Life insurance is one of the financial risk management tools which many employ to offset their risk profile – for some of the stauncher proponents of this resource, it’s actually the cornerstone of their plan for personal financial security. But if you don’t know that much about it to begin with, life insurance can seem ill-equipped to help you take care of your own needs: after all, it only pays out benefits to those who survive you, after your demise, right? Wrong – in fact, life insurance can help you manage financial risks during your lifetime. You can either opt for term life insurance, which will have you covered for a limited period of time (say, 10 to 20 years) and comes with lower premiums, or for permanent life insurance. Should you choose the first variant, know that, in most cases, you’ll be able to switch to permanent life insurance at some point, when you’re financially ready. But why would you want to do that?
The short answer is “financial security” – and during your lifetime, too. You see, permanent life insurance will accumulate cash value while you’re alive. In case you need to use up that value, you can tap into it through one or several disbursements, or even policy loans. Some insurers, for instance, will pay the holder a yearly dividend, which they can then go on to use in any way they see fit – for paying off their premiums, for instance, buying more insurance, or simply to distribute cash. In brief, permanent life insurance can clearly help you manage financial risks during your lifetime and, should you choose to do this, it can also help you invest.
What are your personal financial risks?
Health risks
‘What does permanent life insurance have to do with health risks?’, you may wonder. After all, that’s what health insurance exists, right? To offset the cost of medical care and ensure that you’re not overtaxed by such expenses. However, in some cases, medical expenses can come with such a high toll, or occur in a context in which your health care policy does not provide adequate protection, that you come to require extra money. That’s when permanent life insurance can help: you can cash in portions of it, to cover for medical expenses, or, in the event of long-term care, you can use some of the policy’s cash value to cover for it. Some such policies also come with a disability waiver, which say that the insurance fund will pay for your care, should you become disabled through a unfortunate event.
Debt and business risks
Some expenses in life simply cannot be foretold, while others are too big to be covered through one’s income. Aside from emergencies, consider the situation in which you want to take up a home improvement project or put in a down payment on a home. Of course, you can borrow that money, but you can also convert the cash value of your permanent life insurance to pay the costs.
The cost of education
Is a college education in the books, in your family? Then perhaps the best place to start is a website which offers a calculator, since student loan debt is a painful reality for many these days. The cost of education can run high and if you want to work out that cost, click here. Then, figure out if permanent life insurance can help: perhaps your version of a good life is one at the end of which you leave your grandchildren with the costs of college covered. If this is the case, permanent life insurance and its cash value can be used to fund a college education.
Old age
For some, the definition of a happy, fulfilled life, involves living into one’s ripe old age, as to see children marry, grandchildren born, and bring lifelong plans to fruition. However, what if those 20 to 40 years the average American gets to live post-retirement are under-funded? Permanent life insurance can, in some cases, help with that, as you can convert its cash value into income that you use in your retirement years.