Today’s article comes to us courtesy of Stewart Koesten, M.F.S.F., CFP®, CIMA®, Executive Chairman of KHC Wealth Management. As a financial planning expert, Stewart shares a fresh perspective on how to protect your most important asset using traditional risk management strategies.
Does your financial planner include an analysis of risk exposures other than your investment portfolio? If so, you have probably gotten recommendations to improve your life insurance and perhaps assistance to evaluate your health insurance options. Odds are, however, no one has addressed your need for protecting your income in the event of illness or accident.
I’ve always thought of my earning ability like a machine in the basement that cranked out money every week. What would happen to me and my family if that machine broke? If you had such a machine in your basement, would you insure it? I consider an illness or debilitating accident a bigger risk of loss for me. Why? Because I’d still be around to see how my lack of planning affected everyone. Dying, comparatively speaking, doesn’t worry me as much.
There are 4 steps to the risk management process:
To begin with, we might attempt to avoid your exposure to risk. For example, if you are concerned about permanently disabling yourself, you might choose to store that motorcycle. If you can’t be convinced to store the motorcycle, you might decide to wear appropriate protective gear.
The third step is risk retention. You’ve refused to park the “hog” and delight in wearing protective gear during the summer months. Still, you know you carry some risk of loss. As reasonable people we would calculate whether we could afford to pay for our care in the event of a disabling motorcycle wreck. Now, let’s face it, most of us could not afford that type of financial loss. So, you decide you cannot afford such a loss, thus moving you to step four, risk transfer.
How much risk do you need to transfer? You’d begin by evaluating how your present resources might be used. Things to consider may include company provided short-term and long-term disability benefits, investment assets, retirement plans, spousal income, and Social Security. I would not count too much on Social Security disability benefits. First you have to be eligible, and second you have to qualify. Qualifying presents a problem for many long-term disabled people. If your disability is harsh enough, after several tries you might make it but you’re probably going to have to hire a lawyer to help you through that process.
In the final phase of the risk management process, you’ve decided to transfer some or all risk of loss to an insurance company.
We’ve been fortunate to have a good knowledge base about disability insurance needs analysis and as fee-only wealth managers, we work with a couple of insurance agent specialists who have vast knowledge in this area. What about your financial planner? Has this been a part of your planning?
I can think of few things worse than becoming disabled and not having the resources to meet your and your family’s living needs. Like other forms of insurance that protect against loss, a good advisor can help you evaluate whether you should consider buying disability insurance and a good insurance agent can help you work through the process of qualifying for a policy.
This article is provided by KHC Wealth Management (“KHC” or the “Firm”) for informational purposes only. Investing involves the risk of loss and investors should be prepared to bear potential losses. KHC is an SEC registered investment adviser that maintains a principal place of business in the State of Kansas. The Firm may only transact business in those states in which it is notice filed or qualifies for a corresponding exemption from such requirements. For information about KHC’s registration status and business operations, please consult the Firm’s Form ADV disclosure documents, the most recent versions of which are available on the SEC’s Investment Adviser Public Disclosure website at www.adviserinfo.sec.gov.