Part 5: Risk Management

Austin Colby, CFP^®, MBA

The topic of risk management is oftentimes misunderstood and misused in the world of financial planning.

Risk management, or insurance planning, simply addresses the following question: is there a potential catastrophic financial risk in your life? If the answer is yes, insure that risk. A catastrophic risk would be one that causes substantial, long-lasting financial harm to your financial plan.

Proper life insurance is the most common risk management planning opportunity for the families we serve. We ask questions such as:

• Do you need life insurance?
• If so, for how long?
• How much coverage is appropriate for you?

Life insurance is an excellent risk management tool that very likely fits into 99%+ of our clients’ financial plans—for a season.

However, very few – if any – people need life insurance forever. The idea is to use term (temporary) life insurance to protect family members from an untimely, early death. As a family builds wealth over time, the need for life insurance diminishes. At some point in the future, the family becomes “self-insured,” meaning that its net worth is now large enough to cover any loss of the bread-winner’s income.

Another area that needs to be reviewed regularly is disability insurance. The potential of lost income is a much bigger threat to your financial plan than a short-term stock market crash. If you were unable to work in your current capacity, do you have coverage for the first 30 days? 90 days? Beyond that?

For most clients, paid-time-off (PTO) is available to cover short-term disabilities/illnesses, and everyone who has paid into Social Security qualifies for long-term disability benefits after working a number of years. Is there a plan for income shortfall if someone remains unable to earn income at the same level?

A good risk management plan reviews these questions—and many more—to keep your long-term plan on track.