How to Build an Insurance Plan to Protect What Matters Most
We all face risks every day, from driving a car to the ever-present risk of illness or natural disasters. Protecting yourself from these varied risks is a complex task.
Consider a relatively simple risk: adopting a pet. Picture your newly adopted dog, maybe a little frazzled by his new environment. You’re out on a walk and a neighbor approaches your dog. The dog takes a nip at the stranger and now your neighbor has to go to the emergency room for stitches. As she backs away she lets you know that she intends to sue you for the emergency room cost.
Even if you have homeowners’ or renters’ insurance, your policy may not cover this liability. There’s no “perfect” or “right” insurance plan; this is another case where you need to consider your unique circumstances and determine how much risk you want covered.
Here are a few steps to get started:
Do an Inventory
The first thing you need to know is what people, possessions, and other things you want covered. It might help to make a list of everything you can think of. Consider these broad categories:
- Health – your own and other people (or animals) in your family
- Life – how will your family cope with the loss of a family breadwinner?
- Children – how will they be protected?
- Property – what land, structures, or possessions are vital to your family?
- Income – what if you or another family member are unable to work?
Assess Your Risk
There are four ways to manage risk – some are more expensive, and some may not always be practical. One or all of these methods may be appropriate to make sure you are covered adequately.
Eliminate the risk by not engaging in activities that could trigger the risk. For example, you might decide that having a pet or going on a vacation is not worth the risk, so you’re not going to adopt a pet or go on vacation. Of course, this is not always practical, and requires you to sacrifice a lot.
An insurance policy allows you to transfer the risk to another entity (the insurance company). Of course, you can never fully transfer a risk. If you’re in a car crash and you have car insurance, your financial risk will be covered, but that doesn’t erase any injuries or legal liability.
There are easy things you can do to limit risk and increase precautions. For example, to limit the risk of a house fire, you could install smoke detectors. To limit the risk of injury when driving, wear a seatbelt and drive carefully.
Risk retention means that you decide to accept a risk. In an ideal world, all of your risk would be covered in some way, but of course that may not always be possible. Maybe you decide that you can’t afford to buy a certain type of insurance, and that you would prefer to mitigate your risk and accept any unfortunate consequences. Even if you buy insurance, most plans still require you to first pay a deductible; this deductible cost counts as a risk that you retain.
Build an Asset Protection Plan
Now that you know the different methods for dealing with risk, it’s time to sort out how you want to manage the risks in your life. Put together a plan for each item that you identified in your inventory. It could look something like this:
|Life||Transfer||Research and buy life insurance|
|Reduce||Eat healthy and exercise|
|Auto||Transfer & Retain||Buy car insurance, but retain some risk with a high-deductible plan|
It can be difficult to think about the unpleasant possibilities that life could throw at us at any time. Building an asset protection plan can offer you reassurance that you’ll be able to address these unexpected life events. Who knows, with proper planning you may still be able to adopt that dog!
Saundra Davis is a nationally recognized financial coach and educator. Her experience in the U.S. Navy, where she made every money mistake possible, and her 20 years serving community-based organizations led her to the reality that the best way to help people find a path out of poverty is to help them become their own financial expert.