Insurance 101: How to Handle Risk

Why do you put on sunscreen? Why do you study for a test? Why are you allowed to drive? There is no escaping risk in life; we are made very aware that it lies around every corner. The answer to dealing with risk becomes how you answer these two questions:

1. What is the likelihood that the event will occur? Low or high?
2. What is the level of damage it would cause? Low or high?

How you answer those two questions will influence how you handle each type of risk. Let’s look at an example of each risk scenario as you are getting behind the wheel of your car.

 

Retain a risk

Likelihood is low and damage is low. The chances that you will get a flat tire driving home tonight are low, and the only damage would be the flat tire, which would then have to replace with a spare. This is the type of risk you handle yourself by changing your tire.

Reduce a risk

 Likelihood is high and damage is low. When you’re driving around it is inevitable that you will run out of gas eventually, and the damage will be an empty gas tank, which you will then have to fill. You handle this risk by keeping your gas tank full, consequently reducing your chance of running out of gas.

 

Avoid a risk

Likelihood is high and damage is high. We have all seen the commercials that say something like, “if you drive drunk, you will be caught!“ The risk of getting caught for a DUI is high, not to mention the damages—both socially and financially— are very high! Any risk that can result in death, to yourself and others, should be avoided at all costs.

Transfer a risk

Likelihood is low and damage is high. Accidents happen, there’s no doubt about it, but if you practice safe driving, the likelihood of having an accident is low. However, when accidents do occur, the damages can be very high. This type of risk, when you cannot avoid and that is too costly to retain, is risk you transferred to someone else. This transfer of risk is called insurance.

Check out these fun facts about things worth insuring:

• NFL Player Troy Polamalu took out insurance on his hair because he had a contract with Head and Shoulders shampoo.
• Pop icon Miley Cyrus has made a name for herself in many ways, one of which is by sticking her tongue out in photos. This look has garnered so much attention that Cyrus took out a one-million-dollar insurance policy to protect her tongue!
• Superstar Mariah Carey had an ad campaign with Gillette Razor in which she bestowed the “Legs of a Goddess.” Between that campaign and Carey’s career, her team deemed her legs valuable enough to insure them for $1 billion!

Each of these celebrities’ features were considered too valuable to lose, so the risk of losing them was transferred to an insurance company. As you prepare your Money Vehicle and your financial plan, begin to ask yourself, What is too valuable to lose?

For more information about reducing risk on the road, click here

 

Excerpt from Your Money Vehicle: How to Begin Driving to Financial Freedom! by Jedidiah Collins yourmoneyvehicle.com