Insurance Advice

What Are the Odds? – How Insurance Transfers Risk

A hand pulling up the corner of two cars in a game of poker, showing an ace and king of hearts.

Insurance is a basic part of everybody’s financial planning – from first home buyers all the way through to retirees, each person needs a good understanding of how insurance reduces financial risk.

Insurance – in any form – is about “risk transference”. You consider risks based on what would happen to you if that event happened. The personal impact of losing your assets and if you can take on the cost yourself or if you wish to pay a small insurance premium to transfer some or all of that risk to someone else. In a nut shell that is all insurance really is. You taking a small hit but passing the big hit to another party.

Assessing the Odds

In assessing your ideal policy, an insurance broker will ask you to think about the personal impact of losing your assets. Lots of things go through our minds when assessing that question. Has an event like this happened to me before or someone I know? Can I even afford to transfer the risk? Can I self-insure?

Will it ever happen to me?

But usually we don’t really know the odds.  What are the chances of the things we fear the most actually happening? 

  • Your house being totally destroyed by fire is 5 percent.
  • Dying before you turn 65 is between 12-20 percent.
  • Writing off your car in an accident is 20 percent.
  • Being diagnosed with cancer happens to 1/3 people.
  • Suffering a 6-month disability is 33 percent.

The last one definitely leaps out as a significant risk. In the 1980s according to research that was conducted in NZ, more than 5 out of every 6 “disabilities” were caused by illnesses not accidents therefore not being covered by ACC. Over $100,000 Kiwis were disabled each year and over 50% of them were off work for more than 1 month. 

I would say this is probably even higher now. So, thinking about yourself and your family what is the potential loss for you if it happened to you?

If you are a 30-year old earning $50,000 per year through to age 60 then there is a $1,500,000 potential earnings at stake. Then if you have debt, children, other financial commitments, or life insurance that will be impacted by a loss of income, you can begin to see the very large potential risk.

Transferable Risk

This risk of losing income is most of the time – and for most people – a “transferable” risk.

Here is a thought: if you live week by week and are on a tight budget that relies on every dollar earnt, you are potentially at the most risk.  If you could not survive on any less income than what you have now, maybe you should look at tightening the household budget and transferring some of that risk.

It is all about odds and protecting the financial survival of your family. You want certainty and peace of mind knowing that if it happened to me, I am financially secure.  

Or the other options are:

  • Accept the inevitable – Deal with it when it happens hoping and praying for the best and that family members may help you out.
  • Avoid danger – Don’t leave the house, don’t drive a car, don’t play sports.
  • Reduce risk – Eat healthier, drive slower, get an office job.
  • Transfer risk – Transfer your most important asset or assets to an insurer so they can help give you peace of mind if the worst happens.

Create a safety net

Calculate what is at risk for you and your family or business and put that into perspective. There are thousands of products out there designed to help people in all different situations. I want to help create healthy balance in your life because that is how I like to live my own.

Making sure you have the right amount of what you need and none of what you don’t. I can help you to future proof your plan and give you peace of mind along the way.  Set up a free consultation with us now, and get on your way to financial security.

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