“Failing to plan is planning to fail.” Alan Lakein
Yes, failing to plan the risk management puts you and your family at high financial risk. Risk Management is usually not considered a part of Financial Planning. It is a big mistake.
Risk Management is not about the risk of investing in risky investments. It is about managing risks of untoward events in the life of any of your family members. Every risk in life has a financial consequence.
Risk Management is about managing these risks.
Every family has to evaluate potential risks and endeavour to manage the same. Risk per se may not be under your control but its financial consequences can be managed.
Let’s examine the risks:
- Accident or other illness and hospitalisation of any family members. It could be anyone dependent on your income.
- Critical Illness of any of your family members.
- Fire at your home, office or other immovable assets
- Earthquake and potential of loss of property
- Accident and damage to your vehicle/ third party vehicle
- Loss of Job/ Loss of Income
- Business Loss/ Bankruptcy
- Cyber-attack financial risk
- Death of the earning member
- Travel loss of luggage risk/ Travel accident risk. These are risks as when you travel.
These are 10 foreseeable risks. Each of the risks can have financial implications. Therefore maximum care has to be taken to manage these risks.
Some of the risks like Fire and Earthquake are beyond your control. While some risks like medical emergencies and death are certain.
Here are 3 steps action plan to manage your risks.
Evaluate the Possibilities & Prioritise:
Like the 10 risks mentioned above, evaluate the risk that you, your family, your assets are subjected to.
Every family has some common risks and some specific risks. Some family has a member who travels frequently, or some family has a history of illness, or some family has both the spouse earning.
The specific situation requires specific risk management approach. Know your risk possibilities, know your risk appetite and prioritise your risk management plan.
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Efforts to Avoid:
The first approach to risk management is to make efforts to avoid the occurrence of the risk.
To avoid health-related risk, daily exercise could be a risk avoidance practice. To avoid risk due to Fire, having an up to date fire safety mechanism in place could be a risk avoidance practice.
Income from alternative investments could be a risk avoidance practice for the loss of a job.
Examine and put in place the specific risk avoidance practice in place for each type of identified risks.
“Do not dig a well only after the house catches fire.” Kannada Proverb
Cover the Risks:
Having known the risk and put in place the plans to avoid the risk, next comes is covering the risk.
Yes, all the major anticipated risks can be covered. Insurance companies have elaborate risk insurance policies which can cater to your specific need.
Having an insurance policy means financial aspects of the risk can be managed. You may not be able to avoid the risk completely but the insurance policy can give you comfort by enhancing your ability to deal with the financial implications of the risk.
Hospitalisation due to illness or accident can be managed by the Health Insurance Plan.
Vehicle Insurance covers your repair cost due to an accident. It also covers and 3rd party damage cost.
Loan cover manages the risk of your loan repayment default in case the earning members die.
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Life Insurance Policy can cover financial risk due to the death of the earning members. The risk of the death of an earning member could be many for a family.
It could be a corpus required to manage the day to day survival cost until someone starts earning. It could be survival corpus for senior parents. It could be survival corpus for an aged spouse.
There are many life stage situations which require a big chunk of money. The death of an earning member could create financial havoc for the surviving members.
Adequate Life Insurance Policy makes surviving members live comfortably. They have one thing less to deal with in an otherwise adverse situation.
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Risk Management is a continues process, as risk profile changes periodically. Annual Risk Management exercise is a good practice.
You may have to increase your health and life insurance covers based on the increased cost of hospitalisation and your lifestyle.
Always undertake this exercise of risk management involving all your family members. Your spouse should know this and your children will learn from you.
“Sense and deal with problems in their smallest state, before they grow bigger and become fatal.” Pearl Zhu.
Yes, the risk is smaller until it becomes a reality. Risk is much bigger when the event actually occurs. Planning for risk management when it’s smaller is always a smart strategy to deal with it when the event actually happens.
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