Personal risk and how to manage it!

By Gaurav Mashruwala

 

Risk is nothing but an unfavorable outcome of an event. Event may or may not take place. However if that unfavorable event had to take place; then it can throttle any good plan. Imagine a situation where a person aged 47 has made an excellent retirement plan. He has made investments in assets that will mature exactly at the time of his retirement, at age of 60. There are sufficient tax benefits available for investing in those retirement plans. He has nominated his wife as the beneficiary. The arrangement is inflation proof. All in all, an excellent plan.

 

Unfortunately, he dies at the age of 49, leaving his wife and children either with no assets or assets that will mature after 11 years i.e at the age he would have retired, had he been alive. For the next several years his family will have to live in financial distress. This is an example of excellent retirement planning, but poor risk management.

 

Let us look at another case where a person has an excellent life insurance. In the event of his untimely death, his family would get a large sum of money. This corpus could be utilised to take care of the family for several years. Unfortunately, this person suffers from a heart attack. There is no health insurance. While there is plan in place to meet expenses after his death, there is no plan to meet unforeseen expenses while he is alive. Family will now have to bear entire cost of treatment. Only option left for them is to borrow funds for his treatment.

 

Financial planning without proper risk management is incomplete. A risk management widget replenishes the financial loss suffered owing to the unfavourable outcome of an event. (Read: 5 money must-dos before you turn 30)

 

Risks

There are two kinds of risks: speculative/investment risk and pure risk.

Speculative/investment risk is one where there are three likely outcomes: gain, status quo and loss. When we invest in the stock market we can either gain or loose or there could be a no gain/no loss situation. This is called speculative/investment risk. For this type of risk there is no formal insurance product.

 

Pure risk has two likely outcomes: status quo and loss. While driving on the road there are only two possible outcomes, there can either be an accident or there cannot be an accident. This means there is either loss or status quo. For loss suffered from pure risk there are different kinds of insurance policies.

 

Types of pure risk

Personal risk: This is the risk that affects the income earning capacity of an individual. For example: death, disability, illness, accident, unemployment and so on.

Property risk: This risk results in a loss and/or damage to property. For example: fire, theft, terrorism, war, flood and so on.

Liability risk: This risk exposes an individual to the third party. For example: an accident while driving a car, negligence by a professional and so on. (Read: 5 money must-dos before you turn 30)

continued on page 2