Evaluate Your Personal Insurance Risk

Insurance risk you insure for always drives the insurance policy you buy. For example, insuring for the financial loss associated with a health problem requires you to buy health insurance. Life insurance covers the financial risk of death. Automobile policies cover the risk of damage or total loss of your vehicle. In all cases, insurance is designed to transfer the risk away from you and onto an insurance company, but knowing how to evaluate your risk is necessary before you can even purchase an insurance policy.

Instructions

1. Write down all of your assets on a spreadsheet. This will make it easy to reference each individual asset, if needed.

2. Calculate the value of all your assets on your spreadsheet. Be as specific as possible when calculating values and use the replacement cost of the item in question when calculating how much the item is worth.

3. Add up all of your current expenses and future liabilities. These liabilities could include total mortgage debt, total medical bills or even future college education expenses you expect to incur for your child. Current expenses range from monthly utility bills to mortgage payments to property taxes.

4. Figure out the total amount of insurance risk you have. To do this, determine what assets you could liquidate immediately and compare this amount to the total amount of liabilities you have. Then, decide what assets you would want to liquidate. For example, you may have $20,000 in retirement savings, but if you wouldn't feel comfortable using this money to pay off debt you have, then exclude this amount from the total assets you would use to pay off liabilities and current expenses if you had to.

5. Determine the risks you will incur for retaining any given type of event you want to insure for. For example, figure out how much of your total assets you would use to fix or replace your home or car if either of these were damaged or destroyed. Total up the amount of the liquid assets you have to pass on to your heirs if you die and are unable to pay off your liabilities. If there is a shortfall between your assets and liabilities, this represents the amount of risk you are accepting by not having insurance for that particular type of risk.

Tips & Warnings

• Exclude any savings or other assets you don't want to be used to satisfy liabilities. Purchase insurance to cover any shortfall if you want to insure for the risk in question. You don't have to fully insure all risks, however. You may partially insure some risks while retaining other risks. For example, you may partially insure for automobile insurance by purchasing your state's minimum liability coverage requirement and retaining the risk for collision insurance that would repair or replace your vehicle in the event of an automobile accident.

References

• "Practicing Financial Planning for Professionals (Practitioners' Edition), 10th Edition"; Sid Mittra, Anandi P. Sahu, Robert A Crane; 2007