Insurance and Risk Management

Risk management is the process of determining how you might experience a loss (such as to your house or car) along with options for reducing or eliminating the financial implications of those losses.

Insurance is one of the tools available in this area (other tools include such things as avoiding risky behavior, protecting yourself by wearing your seatbelt). The primary kinds of personal insurance are life, health, disability, long-term care, homeowners, automobile, and liability. As you might guess, there are lots of variations of each of these.

When considering what types of insurance make sense for you, carefully evaluate areas of potential loss. As an example, it does not make any sense at all to avoid paying a $1,000 homeowners insurance premium and then lose a $250,000 house by fire.

On the other hand, it also does not make any sense to try to insure against every single possible area where you might experience a loss. That gets way too expensive.

The key to building a wise insurance portfolio is to balance premium expense against potential financial losses. Those losses you can absorb yourself, keep. The losses that would devastate you financially should potentially be transferred to an insurance company.