Risk Transfer in the Financial Planning Process

No man is worth his salt who is not ready at all times to risk his well-being, to risk his body, to risk his life, in a great cause. —Teddy Roosevelt

I have been looking for an opportunity to use this wonderful quote by Teddy Roosevelt. It is from an article in the New York Times (12/08/1915). The article is a summary of his remarks for the Harvard Advocate in which he promotes the need for military curriculum at schools of higher learning.

The purpose of today’s posting is not to advocate for military curriculum, which I do support, but to discuss risk management in the personal financial planning process. It is human nature to seek security. Security may be defined as the absence of risk. Once the basic needs of food, clothing, and shelter are met, the next need on the list for most of us is a sense of safety/security.For many in our modern societies, security is primarily thought of as economic security for the present and for the future. Will I continue to have a job? What if my automobile is in an accident and I no longer have the ability to travel to work? What if I am disabled and I lose my ability to work? What if my spouse were to prematurely die, how would that income be replaced? Daily, each of us contemplates the risk of losing our economic security.

Historically, this risk was addressed by the community within which we lived or by our immediate family. If a barn burned down the community would help to rebuild the barn. If a farmer died before the corps were harvested, the community would harvest the crops for the surviving family—and they had until spring to make new arrangements!

Today risk is transferred to insurance companies. The process of risk transfer is part of the personal financial planning process. How much risk should be transferred? How much risk should be retained? Insurance agents / brokers are directly compensated by the amount of risk a consumer transfers—hardly a fiduciary transaction! And what about insurance companies: recent events have clearly demonstrated that they are willing to take on too much risk.

The transfer of risk—the purchase of insurance—is a complicated process. It requires a spending plan; emergency reserves (on the part of a consumer); an assessment of risk tolerance and a plan. The next several postings will discuss insurance and risk management.

I hope you will join me for this month’s Webcast: Risk Management and the Personal Financial Planning Process. We will review the various strategies for risk management / insurance in the planning process: property and casualty, disability, health, life, long term care, annuities and how they affect planning for your clients. Join us on Friday, March 28, 2014 at 1:30PM EST. For more information or to register, please send an email to hello@ttillery.com. Virtual Seating is limited. One hour of CE/CPE is available.

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