Manage Your Risk: Step 5 of 5 Fabulous Steps to Financial Freedom


What’s the goal of this step? Prepare for the inevitable but unexpected twists life throws your way in order to protect your wealth.

Why is this important? Humans have an optimism bias; each of us tends to believe that we are less at risk of experiencing a negative event compared to others. It’s a beautiful term that puts our financial health at risk.

Our optimism bias makes us less prone to expect (and save/insure for) events like disability, illness, divorce and death. And, data indicates that women are under-insured - 43% of adult women have no life insurance, yet we comprise 57% of the labor force in the US.  

Appropriately mitigating risks improves your financial stability and makes you less prone to catastrophic costs associated with unexpected life events, which can drain your hard-earned wealth. Let me be clear - I don’t believe we should over-insure or purchase extravagant, complicated policies to manage risk. However, I do believe it is critical to have an appropriate level of insurance that you understand.  Let’s dig in.

When and how do I do it? There are four types of insurance I’d like you to consider.  

Let’s start with health insurance. This is a non-negotiable, as healthcare costs continue to rise. Your health insurance options will depend on factors like your employer, your income, and your health. Put this at the very top of your priority list if you are currently not insured. If health insurance is new to you, check out this summary of health insurance basics.

Life insurance is next. Many of you will be just fine with a term insurance policy, which provides coverage for a set amount of time (the term). The two big decisions you’ll need to make with this policy is which term to select, and how much coverage to purchase.  Don’t let analysis paralysis freeze you! This Investopedia article provides a succinct overview to the common factors people consider when determining insurance needs.

If you’re a parent who doesn’t work outside the home, please don’t skip insurance because you’re "not bringing in any income.” You are likely providing a valuable service, be it child care, household management, elder care - so consider a policy that would allow your survivors to continue to receive care.

Disability insurance is something I recommend considering if you don’t have a partner, and your own work is your primary source of income. When your financial security is solely on your shoulders, an unexpected disability could hinder your future trajectory. If you were to face a disability that put you out of work, you’d have enough to deal with - don’t add undue financial strain to the list. This article from Clark Howard provides a simple primer on disability insurance.

Auto insurance - if you drive - is last on my list because it's often required by law for vehicle owners, so you’ve probably already purchased a policy. My advice? Increase your deductible (the amount you pay out of pocket before your coverage kicks in) if you can afford to do so. That change will save you money on your premiums. Also, shop around at least once a year to see if you can secure a better rate.

There are many other types of insurance, but if you’ve explored these four, you’re far better off than many, and you’ve taken steps to mitigate your risk. Are there any of these you don’t have today? What insurance advice do you have?  

xoxo, Ms. Financier