Protecting family assets: Part 1
Sources of family financial risk and possible solutions.
Regardless of our family situation, each of us desires the peace of mind that comes with knowing that our financial situation and our assets are protected from serious harm or loss. Begin by thinking about the types of financial losses that might happen and then look at the options available to us to reduce the impact of the losses.
The potential financial risk in our lives falls into several categories: illness or accident, legal liability, death and property loss. Examples of potential financial risks for these categories might be high medical bills, loss of income, being sued, fire, theft or natural disaster.
There are many options for managing financial risk. “Avoid it” is one option. Get rid of the car or the house or don’t ski or be involved in high risk activities where the chances of injure is greater. Another option is to reduce it. Reduce the risk by installing smoke detectors and bolt locks or by keeping the house and garage uncluttered. A third option is to self-insure. This is where you are financially prepared for a major loss such as becoming ill and needing surgery or losing you home to a fire. This takes a great deal of discipline to save enough funds for such major events. Finally, the fourth option is “transfer it” by acquiring insurance.
Steps in asset protection are much like the process that you would use in managing any part of your life. First, Start by identifying sources to risk. Do you have car, do you live near a water source, do you enjoy risk taking hobbies, etc.?
Second, evaluate the potential loss or the severity of the loss. If you are displaced because your house has been destroyed do you have the funds to cover the cost of temporary shelter, to rebuild and replace items? If you break your leg skiing, do you have the money to pay for the medical cost and to cover living expenses while you off from work.
Third, select a way to handle the risk exposure. Again, think about the options for managing financial risk: “avoid it” – sell car or avoid participating in high risk activities, “reduce it”-drive carefully, do not have a trampoline in your back yard, “accept it”- have a car that is not worth much and only have liability insurance coverage, take the chance that you will not become sick or get seriously hurt, or “transfer it”- purchase insurance.
Once this assessment is completed, take a good look at you financial plan to make adjustments as needed and then implement the plan. Make sure to evaluate and adjust the plan every couple of years. Principles of asset protection are to never risk a lot to save a little, never risk more than you can afford to lose and access if you can accept financial impact of small risks. Create a plan to insure against major risk possibilities.
The goal of risk management is to protect the resources and assets you have from the possibility of financial loss. Your personal risk management plan will grow out of your personal situation: your job, size of household, income, savings, etc.