Declaration of Independence

We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness. - That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed.

Friday, May 27, 2022

What Is Meant by Risk Management and Adequate Insurance?

            Families, communities, and nations are stronger when individuals carry sufficient insurance. When we are single with no one dependent on our income, we do not need insurance. Once we are married and/or have children – or other dependents – we have a moral responsibility to have sufficient insurance. If we have dependents who have claim on our income, we should have enough life insurance to meet their needs if something happens to us. If we are dependent on our income, we should carry disability insurance. Adequate insurance will give us or our survivors opportunities to prosper in difficult times.

            E. Jeffrey Hill and Bryan L. Sudweeks wrote a textbook titled Fundamentals of Family Finance – Living Joyfully within Your Means (2016). In their chapter about insurance and risk management, they made the following statement: “If you purchase too much insurance or the wrong kind of insurance, you are wasting money. If you purchase too little insurance, you are exposed to unnecessary risk. Understanding risk is an important part in determining the right level of insurance you should have. You can manage risk in four ways: you can avoid it, reduce it, assume it, or transfer it” (p. 89).

            The authors further explained that we “can avoid some risks by choosing not to participate in activities where you will likely be hurt" (p. 89). Activities that can be avoided are bull riding, bungee jumping, sky diving, and rock climbing. They would also include things like smoking tobacco and drinking alcohol. The authors called these activities “high-severity, high-frequency risk activities” and said that insurance for them is expensive.

            The second way to manage risk is to reduce the risks. The authors suggested that we can reduce our need for medical care by taking care of our bodies with “regular exercise, adequate sleep, and good nutrition” (p. 89). We can reduce the risk of a burning home by “purchasing a fire extinguisher,” of “injury or death in a car accident by wearing your seat belt” (p. 89). We should reduce our risks wherever possible.

            The third way to manage risk is to “assume (or retain) some types of risk through self-insurance, setting aside some funds to cover potential losses” (p. 89). If a car is more than ten years old, we should consider not buying collision and comprehensive insurance on it and save the amount that we would pay in premiums.

            The fourth way to manage risk is to “transfer risk to others by purchasing insurance, thus transferring financial responsibility for a specific low-frequency, high-cost risk from yourself to an insurance company. This is why you should get some form of life insurance, homeowners insurance, health insurance, disability insurance, and automobile insurance” (p. 89).

            We should use wisdom and good judgment when buying insurance. We should not purchase too much insurance, but we should buy adequate insurance. Elder Marvin J. Ashton gave the following counsel:

It is most important to have sufficient medical, automobile, and homeowner’s insurance and an adequate life insurance program. Costs associated with illness, accident, and death may be so large that uninsured families can be financially burdened for many years ("Guide to Family Finance," Liahona, April 2000).

            Responsible money management includes purchasing adequate insurance – life insurance, homeowners insurance, health insurance, disability insurance, and automobile insurance. Parents can strengthen their family, community, and nation by carrying sufficient insurance.   

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