Do not ignore insurable risks that could destroy your best laid financial plans
A previous financial article, “The Solution – ONLY follow financial strategies that are scientific, passive, diversified, savings focused, risk controlled, low cost, and tax efficient,” suggested that investors are much better off with a well-considered financial plan. A stable set of financial beliefs can help you to keep focused and on track throughout your life. This follow-up article discusses the additional need for your personal financial plan to consider insurable risks that might be covered by cost-effective insurance products.
A personal financial plan is not complete without needed insurance.
Individuals and families are unpredictably vulnerable to disease, disability, and death. Other factors beyond their control can interfere with their ability to be fully employed or to be employed at all. Assets can be damaged or destroyed. Legal actions and financial predators can drain assets.
As you use your favorite personal finance software to develop a workable lifetime financial plan, you should also consider where you might be vulnerable to other risks that would disrupt your financial planning. Some of these risks could be ameliorated through insurance. Insurance may provide cost-effective risk pooling benefits in some circumstances. However, in other situations, the net present value of insurance premiums may be too high to warrant carrying the insurance, despite the risks. (See: Insure against financial risks economically)
Buying appropriate and economical insurance is not simple. The menu of insurance choices is complex, and insurance product complexity has increased over time. Constantly shifting games are played between insurance providers and insurance consumers. As we should expect them to do, insurance companies pursue higher profits and work to limit their risk exposure through actuarial analysis and (usually) careful risk underwriting practices to avoid clients who would potentially be more costly.
At the same time, many consumers are aware of their particular risk exposures and may succeed in concealing them when purchasing insurance. This is known as “adverse selection.” The very clients that want to buy certain types of insurance are the ones that insurance companies seek to avoid. Insurance is a minefield of moral hazards on both sides.
From an economic standpoint, this means that insurance will never be a bargain. Rates must be set by the insurance company to make a profit from the mix of people who make it into the insurance pool, including those with personal knowledge of [...]