Over the next few days I’ll be exploring how to leverage insurance to reduce financial risks. Let me begin by saying that insurance is a fantastic tool towards financial wellness and the more you understand how each product works, you’ll be able to tailor options to your needs.
Your first option in every situation is to self-insure (check out this great post from Mila Araujo). This means you have enough reserves to cover a financial loss and it would not create a hardship for you. To self-insure, impacts your financial wellness in two ways. First, you keep control of your money and use it specifically as you choose. Second, by keeping more of your money, you are able to handle much higher deductibles on insurance policies which significantly reduces your cost for insurance.
The other option is to pay for someone else to carry the risk. For example, you could pay $9.99 per month to have a warranty on your smartphone (yes, that’s insurance too) to repair or replace it. The only way you’ll ever get a return of your money is in the event of a covered claim. It’s easy for these little charges to add up your cash flow. Maybe having the warranty gives you peace of mind, which is also important to consider.
There’s an interesting balance between covering as much as you can with your own resources and purchasing insurance to cover potential risks that could devastate you. Self-insure as much as you can, then purchase insurance for the big stuff.
Crafting your own personal insurance strategy begins with knowing yourself and what matters most to you. Here is a hierarchy in order of importance that might help guide you as you map out your insurance strategy:
- Protect yourself (Self-care, Health Insurance) – your body can do amazing things, especially when you take utmost care of your physical, mental, emotional and spiritual wellbeing. Strength, flexibility and stamina will help you navigate many challenges along the way.
- Protect your income (Savings, Disability Income, Investments, Retirement Savings) -being independent means covering your living expenses on your own. Slowly build a personal independence fund to replace a shortfall in income when needed. Develop hobbies, skills or assets that could bring in additional income or replace current source of income.
- Protect your dependents (Savings, Will, Trust, Life Insurance) – being responsible for others includes contributing towards their financial wellness. Dependents can include parents, pets, charities or any other life that your financial support impacts.
- Protect your stuff (Savings, Property Insurance, Warranties) — owning things can be expensive. The more you know how to repair and restore property, the more financially independent you will become. Rather than paying for warranties and experts to fix things, you can funnel those funds towards bigger dreams.
Stay tuned as we explore each one of these insurance areas over the next few days. Looking forward to your comments and questions!