Financial risk is something we’ve covered at length – you might, for instance, have read about the four dimensional risk
profiling technique, which takes into account the dynamic nature of risk
management. That article, like many others on the topic of risk, starts from
the assumption that it’s often difficult to assess risk, since it depends on so
many outlying factors, most of which are subject to change throughout time. And
as numerous authors have suggested, a poorly articulated risk profile could become
outdated far faster than you initially thought out. Today’s post looks into yet
another articulation of financial risk: that exerted upon one’s personal finances.
Ideally, we all set out in life with a number of goals and
dreams, toward which we work and build on. However, there can be no talk of
personal finance risk management until we understand that, often enough, life
gets in the way and throws a proverbial monkey wrench in our plans. What is
there to be done? Be as prepared as possible, since you can’t really prevent or
expect the unexpected. You can, however, understand what the variables of that
‘unexpected’ might be.
Is life insurance the answer?
Life insurance is one of the financial risk management tools
which many employ to offset their risk profile – for some of the stauncher
proponents of this resource, it’s actually the cornerstone of their plan for
personal financial security. But if you don’t know that much about it to begin
with, life insurance can seem ill-equipped to help you take care of your own
needs: after all, it only pays out benefits to those who survive you, after
your demise, right? Wrong – in fact, life insurance can help you manage
financial risks during your lifetime. You can either opt for term life
insurance, which will have you covered for a limited period of time (say, 10 to
20 years) and comes with lower premiums, or for permanent life insurance.
Should you choose the first variant, know that, in most cases, you’ll be able
to switch to permanent life insurance at some point, when you’re financially
ready. But why would you want to do that?
The short answer is “financial security” – and during your
lifetime, too. You see, permanent life insurance will accumulate cash value while
you’re alive. In case you need to use up that value, you can tap into it
through one or several disbursements, or even policy loans. Some insurers, for
instance, will pay the holder a yearly dividend, which they can then go on to
use in any way they see fit – for paying off their premiums, for instance,
buying more insurance, or simply to distribute cash. In brief, permanent life
insurance can clearly help you manage financial risks during your lifetime and,
should you choose to do this, it can also help you invest.
What are your personal financial risks?
Health
risks
‘What does permanent life insurance have to do with health
risks?’, you may wonder. After all, that’s what health insurance exists, right?
To offset the cost of medical care and ensure that you’re not overtaxed by such
expenses. However, in some cases, medical expenses can come with such a high
toll, or occur in a context in which your health care policy does not provide
adequate protection, that you come to require extra money. That’s when
permanent life insurance can help: you can cash in portions of it, to cover for
medical expenses, or, in the event of long-term care, you can use some of the
policy’s cash value to cover for it. Some such policies also come with a
disability waiver, which say that the insurance fund will pay for your care,
should you become disabled through a unfortunate event.
Debt
and business risks
Some expenses in life simply cannot be foretold, while others
are too big to be covered through one’s income. Aside from emergencies,
consider the situation in which you want to take up a home improvement project
or put in a down payment on a home. Of course, you can borrow that money, but
you can also convert the cash value of your permanent life insurance to pay the
costs.
The
cost of education
Is a college education in the books, in your family? Then
perhaps the best place to start is a website which offers a calculator, since
student loan debt is a painful reality for many these days. The cost of
education can run high and if you want to work out that cost, click here. Then,
figure out if permanent life insurance can help: perhaps your version of a good
life is one at the end of which you leave your grandchildren with the costs of
college covered. If this is the case, permanent life insurance and its cash
value can be used to fund a college education.
Old
age
For some, the definition of a happy, fulfilled life, involves
living into one’s ripe old age, as to see children marry, grandchildren born,
and bring lifelong plans to fruition. However, what if those 20 to 40 years the
average American gets to live post-retirement are under-funded? Permanent life
insurance can, in some cases, help with that, as you can convert its cash value
into income that you use in your retirement years.
Tax
risks
Perhaps
the top advantage of holding a permanent life insurance policy is that it can
help with your taxes. As explained above, most permanent life insurance
policies will accumulate some earnings, which are not taxable. If you do choose
to cash out some of the gains on your policy, you can lower those very taxable
gains by reducing the amount of protection your insurance policy warrants in
the first place. You can basically do the same thing with an investment
account, like a 401k or an IRA and, depending on whom you ask, it’s probably a
better idea to fund such accounts to the maximum, before you even consider an
insurance policy with an investment portion. However, such policies often come
with a wide and interesting range of options for you to invest in: stocks,
bonds, balanced and international mutual funds, and the like.