Family $$$ Matters… Part 4 – Reviewing our Risk Management

 

Welcome to Part 4 of Family Money Matters!

If you’re coming in midway to this series, then before you read on please go back and read my introduction to this series and my disclaimer in Part 1, then read Part 2, and Part 3 so that you are up to date with the process, know where I’m going with this & why…

Today I will be sharing my process of reviewing our Risk Management…

Risk Management:

I don’t really know anyone who likes to review their risk management… it’s definitely one of those horrible jobs that I tend to put off and put off and put off and put off… Because lets face it, who likes to contemplate all that bad stuff happening!! Not me that’s for sure! Bad stuff only happens to other people doesn’t it? – That’s what my bury my head in the sand mentality tells me anyway! 
Unfortunately the wrath of nature that we have been unfortunate enough to witness here in Australasia in the first 2 months of 2011, has really made it hit home to me that that bad stuff could indeed happen to us. Time is a limiting factor for all of us… and I know for sure that my family are vulnerable and unprotected in some areas especially in the case that a life event does occur and render us without what we consider in the western world to be the basic necessities of life. It doesn’t bear thinking about really does it?…

That’s the real crux of why I wanted to readdress my financial plan, and why I felt compelled to share my process about this otherwise often “taboo” subject with you! The Queensland Floods, Cyclone Yasi and Christchurch Earthquake all in rapid sequence has meant that our TV has been regularly filled with horror stories, desperate people, destroyed homes and livelihoods, uncertain futures… we’ve been seeing images not unlike those of a war zone – here in our own country(s) and they are becoming scarily frequent.

Even for an otherwise irregular news watcher like myself, these stories have been hard to avoid… I’ve been watching in disbelief and the images have etched their way into my subconscious…

Don’t get me wrong, it’s always heart breaking seeing images like these – regardless of the country or people that they are occurring to. But I have found it especially distressing seeing them happen practically in my own backyard. It shouldn’t be different, but if I’m honest it is… Purely because I’m able to relate to it more… that could have been me – my family, my home lost, us without basic amenities food, water, power, sewerage, communication… basic sanitation!! 
How much do we take these things for granted! And how would we cope without them?!…

Definitely time to review our risk management?…

So what even is risk management?   
risk  (rsk)n.

4.

a. The variability of returns from an investment.

b. The chance of nonpayment of a debt.

Risk management is preparing ourselves for the worst…

Insuring, to the best of our ability, that we will be able to cope in an unforeseen event causing “harm or loss; danger”.

What functions do you have in place to prepare for the worst?

In my ugly side of nature part 2 post I already touched on our own need for practical things such as an emergency supply kit. But what other things do we need to consider?

1. Do you have a will?…

            …. and just as importantly – is it up to date…?

What about these guys?…

Have you considered what will happen to you, your family, your debt, your possessions etc… if something were to happen to you? Many people, especially singles, think that it’s not really that necessary to have one – or simply haven’t thought about the need… But the ramifications of not having one can be huge!

If you die in Australia/New Zealand and do not have a will, then your property and assets become “intestacy”.  Basically this means that you have not validly disposed of some or all of your assets, and your assets will be distributed using a legal formula. Not only can this not be to your choosing, but this can also take a long time – in fact in can take several years… (you can read more about it what happens if you die without a will here). What would happen to your children in particular if this were to happen? In particular who would you want to look after them?

So I would recommend that everybody establishes a will! And also importantly you must to keep it up to date! Marriage, children, separation, other big life changes, all need to be taken into consideration and your will should be updated accordingly.

Establishing a will is not hard, and in most cases it can be done at minimal cost – if not free. You can buy a will kit in the Australian post office even.

So I encourage you to look into whether you have one and whether it is up to date…

2. Power of Attorney:

What would the implications for you and your family be if you lost the capacity to make decisions for yourself? You may like to consider here the relevance of having a power of attorney. You can read more about different types of powers of attorney here…

3. Risk Insurance:

Life insurance, trauma insurance, income protection insurance, loan protection insurance, comprehensive health insurance, hospital cover, indemnity, home, car, contents insurance… so many different kinds of insurance!!

Most people that I know have some kind of home, car & contents insurance insurance for our stuff and possessions…

But think for a minute, and ask yourself…

“What is your most valuable asset?”

When I used to ask this as part of my job, most people would say that their house was their most valuable asset. (Including me – I said that too)

… That may be your most valuable possession – but really you are your most important asset. You are what makes your life what it is…

Without your life what would be left of any real value for your family, and how would they cope?

Without your health how would you cope?

Without your ability to work – how would you survive and make ends meet?

So we really need to consider this when we are addressing our risk management insurance. If it was absolutely possible, and money was no object, we should all have every single one of them right? I mean if cost was not an object, most people would agree that they are all important and valuable risks to have covered wouldn’t they?

But lets face it – there is a cost involved – often a sizeable one. Therefore unfortunately it’s not always practical for everyone to have all of them in place.

 

So how do you decide which ones to have if you simply can’t afford them all?

Well really that’s up to you… how do you decide which ones to have?

This is a little exercise that we use to decide which ones we should have:

 ** Take a piece of paper and a pencil and write a list of all of the different types of insurance

 **  Without yet researching the price of any of them (that bit is crucial) – individually go through and review each one – what risk does it cover? How relevant to you is it? How would you feel if you didn’t cover yourself for that risk and it did happen?

 **  After discussing each one, rank them in order of highest importance to you… which ones could you absolutely not live without, which ones would definitely be nice to have if you could afford it, and if necessary which ones would you be comfortable with doing without, or reducing, if your budget didn’t allow full cover?

**  Then look at the cost of them. After this step you may still need to review them again – but at least this way you are thinking about what is most important to you – and not making a decision based solely how how much they cost.

How much cover should you have?

Well that again depends on your circumstances. If you are seeking professional advice they should be able to help you out with some formulas and suggestions based on your individual situation. One option if you can’t afford to cover everything is to perhaps reduce your cover in some areas, having minimum cover in some areas – but still at least having them covered.

When it comes to life insurance in my experience I’ve found that many people are either uninsured or under or over insured and aren’t sure why they have the level of cover that they have. I don’t think I ever really met a single client who had cover, knew how much and why it was that much…

So, one way you can figure out what you might need for life insurance is to use a formula of your debt & cost of future investments.

For example…

funeral expenses + home loan(s) if applicable + other debt if applicable + school/university fees for your children’s future education if relevant + 2 years salary to live on to allow you some time to grieve = amount of cover.

That’s just one example of the type of things you should consider anyway… again, it will depend on what you most place your priorities in.

Conclusion:

Risk Management = ewwwww yuck to think about, but another crucial part of the overal financial plan… 

 

 

Back tomorrow with our final step – Part 5: The Review Process…