- High probability and high severity risk exposures: Avoid risk exposures. When feasible, consider transferring risk exposures via insurance contracts or shifting risk exposures via derivative contracts (forward-based contracts or option-based contracts); notably, these risk exposures are typically not transferrable or shiftable. For example, probability of death can be reduced by avoiding driving while intoxicated.
- Low probability and high severity risk exposures: Transfer risk exposures via insurance contracts or shift risk exposures via derivative contracts (forward-based contracts or option-based contracts). For example, homeowners insurance can protect against financial losses experienced in the unlikely event of a home fire.
- High probability and low severity risk exposures: Self-insure (retain) and reduce risk exposures. For example, probability of smartphone damage can be reduced by using a phone case and screen protector.
- Low probability and low severity risk exposures: Self-insure (retain). For example, automobile towing costs can be covered using savings in the unlikely event of automobile mechanical breakdown.
- Potential risk exposures include personal* (health, life, long term disability), property (home, auto), and liability (personal, professional or “errors and omissions”, malpractice, business).
- Income replacement needs for surviving dependents in the event of premature and unexpected death of an income earner are best addressed by utilizing term life insurance contracts rather than universal life, whole life, permanent life, and cash value life insurance contracts.* For individuals requiring life insurance contracts, life insurance needs can be estimated by utilizing the human life value method, capitalization of earnings method, and / or financial needs method.
- Major sources of health benefits may include employer provisioned health benefits (e.g., group comprehensive major medical insurance contracts), government provisioned health benefits (Medicare, Medicaid), and individual or personal health insurance contracts.
- Major sources of disability benefits may include employer provisioned disability benefits (sick leave plans or paid time off, short term disability benefits, long term disability benefits), government provisioned disability benefits (Social Security Disability Income, worker’s compensation disability benefits, state short term disability benefits in certain states), and individual or personal disability insurance contracts.
- Self-insure (retain) to the maximum that you can comfortably afford and utilize appropriate, broad, and cost effective insurance contracts for major exposures that have the potential of inducing catastrophic financial losses (i.e., maintain the highest deductibles and longest elimination or waiting periods comfortably afforded).
- Self-insurance (retention) is accomplished by accumulating an emergency fund of highly liquid and marketable stable value assets (cash and money market securities), covering at least 3-6 months of non-discretionary expenses.
Please reference “Your path to financial independence” topic for further refinement.
* Note: Long term care is specifically excluded from this list. Please reference “Clearly detrimental strategies and products that we do not utilize, recommend, or offer” topic for discussions regarding long term care insurance contracts and universal life, whole life, permanent life, and cash value life insurance contracts.