Dorie Blackwood | Understanding personal financial risks
Personal financial risk may be defined as the exposure of an income earner to uncontrollable or unexpected events that can result in major financial loss and hardships for self and family. The events creating the risks are: living too long, dying too soon, major illness, and disability. Because personal risks can be devastating to a family's economic viability, it is important that we think about them ahead of time, and plan a coping strategy.
Living Too Long:
Whereas we celebrate golden agers, the challenge to pay for medical and living expenses for elders can be a burden for family members, especially those who concurrently have to also support their own children. If you wish to be remembered as being financially independent and prudent, then a solid retirement plan that provides an income in perpetuity is critical. An annuity as well as income-producing assets should be part of the mix of investments against old age. Generally, relatives are more willing to care for elderly relatives with the means to sustain themselves, than those dependent for their every need.
Dying Too Soon:
When parents die prior to fulfilling their obligations to children and dependent relatives, family members often assume those responsibilities. The lack of adequate provision by parents could result in the impoverishment of the family members who assume the parenting role. Not only is it strenuous for them to bear the costs associated with last expenses and funerals, children may be denied university education, proper medical care, the opportunity to develop talents and gifts, leading to a diminished quality of life for the entire family.
Major Illness and Disability:
The cost to treat major illnesses can be exorbitant. In a Gleaner interview in October 2017, Dr. Guyan Arscott noted that the treatment for breast cancer can ruin a family's finances. The high price of diagnostic tests, surgery, chemotherapy, other treatments and medication, can wreak havoc on an individual's financial resources. Delay to access loans to pay for medical care may be a further threat to a patient's life. Disability resulting from illness or accident can hit a family's finances real hard. Medical expenses, the price for treatments, rehabilitative equipment, and lifestyle changes, could be prohibitive.
There are four main strategies that can assist with personal financial risks. Risk avoidance, risk reduction, personal savings or risk assumption, and risk transfer. Risk avoidance involves preventive measures. Avoidance consists of taking care of one's health and safety, as much as possible. It includes putting into practice the public education messages regarding weight management, and disease control, drinking responsibly, reducing road speed and putting in place security systems where risk for accident and exposure to crime are particularly high.
Risk reduction methods consist of fast response to illness and accidents to limit the severity of potential loss. Visiting the doctor periodically, and at the first sign of a health issue, following through with treatments and therapy, will reduce the incidences and of death and disability through early detection and care management.
Some risks, however, cannot be avoided. Accidents, illnesses, death, and disability can happen without the opportunity to either prevent or reduce the effects. If the family has sufficient cash, or other liquid assets, then the financial needs attendant to such situations may be met. However, this method of assuming the risk, leads to diminished wealth, that could perhaps be better used to enhance the lives of survivors. Savings may be totally wiped out after one major illness or accident.
Transferring the risk is perhaps the best method of dealing with personal financial risks. Maybe there's no need to stress the value of health insurance, as enough Jamaicans have benefited from coverage. The emphasis here is therefore on disability and life insurance as the most effective methods for dealing with long term or permanent loss of income.
When individuals purchase life insurance (and some policies may include dread disease cover), the financial risk is transferred to an insurance provider. In the event of diagnosis with one of the covered illnesses, the company will pay the agreed face value to the insured person. The financial assistance from a policy kept in force could determine whether the person actually survives a devastating disease.
It is interesting that despite the negative buzz about life insurance, when a loved one passes, one of the first concern is money for funeral and associated expenses. Most of us do not like to think about death, let alone plan for it. But here is the challenge; whether we have a plan or not, death is inevitable, and someone will be left with the bill. If that is not disturbing enough, then think about your children and how they are likely to fare without you. Talk through the options with a financial adviser when next you visit the bank, credit union, or insurance company.
- Dorie Blackwood is a chartered life underwriter, Fellow Life Management Institute, and a learning and development practitioner. She may be contacted at email@example.com