Prioritizing Financial Risk

Protecting you and your family from exposure to financial risks looming in your life is easily one of the more uninteresting portions of financial planning for many people. It costs money (sometimes quite a bit), requires you to think about negative events that could happen to you or a loved one (not at the top of anyone’s list) and make rational, logical decisions with money that in many cases has already been directed towards discretionary expenses. 


But bankruptcy is real.  Income unexpectedly disappearing from the household does occur.  And when you are prepared for the unexpected, it does not make the situation easy, but it can remove the stress of money that plagues so many unprepared families.  It’s one less thing to worry about, and financial issues are a common cause of stress between spouses.


Whether you are just starting out in the adult world, or just giving risk management a look for the first time, it is important to understand your exposures and how they can affect you financially.  In today’s blog, we discuss what if you had limited funds to purchase insurance.  What would you purchase first?  Our priority list for managing financial risks is as follows:


  1. Health Insurance:  This insurance is easily the most expensive, and easily the most important.  There are a number of ways that you could suddenly be faced with insurmountable medical bills that could almost assure you of bankruptcy.  Even a bill that you could theoretically pay off over 15 or 20 years would crush your capability of saving for an enjoyable retirement lifestyle.  Why risk that?


  1. Disability Insurance:  Is your income appropriately insured?  In my years of experience building financial plans for clients, I have found this question to be left unanswered more times than not when asking prospective clients.  Many people don’t think about protecting their income because they always say, “That can’t happen to me.”  But studies suggest that around 25% of all working adults (age 16-65) will experience a disability before normal retirement age.  I have known that statistic for years and still find it staggering.  Most people are skeptical the first time they hear it.  Have you ever spent time considering how valuable your stream of income is to your household?  Do you know how much of your income is protected?


  1. Term Life Insurance:  This is the easiest problem to which many Americans relate.  If your spouse passes away prematurely, there is usually a financial hole that appears and term life insurance is an inexpensive solution to plugging that hole.  Simple. Problem Solved.  But the reality is that you are far less likely to experience this issue than any of the three preceding risks.  The data proves it.  That doesn’t mean it’s not important to protect your family with term life insurance; you just need to understand where it lies in relation to the likelihood of other risks occurring.  Have you properly provided for your family financially if you passed away prematurely?


  1. Umbrella Insurance:  An auto accident from distracted driving (texting by your teen or even you) or a faulty part of your home that injures someone visiting for a party can be a recipe for a lawsuit.  This is a litigious society in which we live.  The cost of a judgment against you in a lawsuit could be all of your assets you possess and potentially garnishment of your wages for years to come.  This is where a personal umbrella policy comes in to play.  This policy is designed to provide liability coverage for large legal claims or judgments.  Coverage usually begins at $1M over and above the coverage you have in force on specific assets and is incredibly inexpensive.  Any financial risk that brings bankruptcy into play is coverage that should be considered wise.


  1. Long-Term Care Insurance:  You have worked really hard to save and invest your money.  You have enough money to pay yourself in retirement as you wish – assuming you don’t have a long-term care event.  There is a 52% chance of needing long-term care.  Approximately 1 in 7 will require care for greater than 5 years, and the cost of care for a private room in a nursing home or a nurse in your home around the clock is staggeringly expensive.  PWC suggests that the current average lifetime cost of long-term care is about $172,000 and the median cost is $107k.  There is a 25% chance that your long-term care event will cost you over $240k.  This puts a big ding in most Americans retirement savings and this hole in your plan should be addressed immediately.  Could you and your spouse afford a bill that large in the middle of your retirement years?


  1. Deferred & Immediate Annuities, Cash-Value Life Insurance, Life Insurance with LTC Riders:  These products are useful in very specific financial planning situations but are sold many times to people that aren’t in those situations.  Insurance should be used to insure something while investments are best for saving and investing.  Sales people of these products will try to convince you otherwise, but we find it few and far between that these are the best items from our clients. 


-Mark Hume & Marshall Rathmell-

Marshall Rathmell

Marshall Rathmell

Marshall Rathmell CFP®, CPA/PFS is the CEO, Shareholder and Financial Planner with BCR Wealth Strategies.