This week we’ll discuss the first risk categories mentioned in last week’s general introduction to personal risk. The risk of premature death and longevity risk are distinctly different uncertainties but both can be addressed with insurance products. We transfer (or share) some of these risks with the insurer by purchasing an insurance product specifically designed for the particular issue.
Personal financial risk is anything that exposes a person to the possibility of losing something of value. These risks can take many forms including loss of employment/income, losses on investments, theft as well as many others.
Our final posting on risk management will deal with an insurance product that is one of the most under-appreciated policies available. It is also one of the newest. Long term care insurance does not date back hundreds of years like life insurance and annuities. Rather, it is an outgrowth of the extended life expectancies that improved nutrition and health care have provided for us in the past seventy-five years. The first long term care insurance policies started to appear in the late 1970’s but initial acceptance of the concept was slow, and the idea didn’t gain much traction until the late 1980’s and early 1990’s. The insurers offering this product have encountered some missteps and the policies offered in 2020 have certainly evolved over time.
Today we’ll discuss an insurance product that has been described as the “inverse of life insurance” and like life insurance, has been around for centuries. The term annuity is derived from the Latin word “annua” which in Roman times referred to annual stipends. Present day annuities generally consist of regular (most commonly monthly) payments made to a beneficiary by an insurance company. Payments can be structured for a specific period of time, say ten years, or for the remainder of an annuitant’s life. In the case of a joint and survivor annuity payment, the income stream can continue until the passing of the second to die. An astute observer once described the function of both products by stating, “people buy life insurance to protect against dying prematurely and purchase annuities to protect against living too long.”
Our next posting will discuss life insurance, and in particular, some business uses of life insurance. Many successful entrepreneurs are so busy addressing the day-to-day operational challenges of their businesses that they never recognize the potential negative ramifications of an untimely death. Life insurance can be used in some creative ways to ameliorate this situation.
Our next four postings will deal with risk, and in particular, the concept of risk transfer via insurance. Everyone on earth faces risks of various kinds. Premature death, loss of a dwelling, liability for causing a loss to another party, inability to perform activities of daily living and suffering a severe financial loss are only some of the risks we encounter in life. We may have choices to (1) Retain the risk (2) Avoid the risk (3) Reduce the risk and (4) Transfer the risk to another party. Insurance involves option #4 in that it allows us to bring in another entity which will assume some of the financial burden caused by the catastrophic event.
Planning, planning, planning. It seems like that’s all we hear about these days. Career planning, family planning, financial planning, retirement planning. Then what? What do we plan for after planning for retirement?
When people consider the subject of long-term care, they often think about nursing homes. In fact, long-term care has little to do with nursing homes. Understanding the difference can help you protect your family and finances.