CommonLounge Archive

Risk Protection

March 15, 2018

Preparing for the unexpected is not always something people want to think about when trying to improve their financial situation. It is the one area of our finances we commonly put off. Someone who is prepared and protected from a disaster can avoid significant setbacks in their financial situation; after all, large setbacks can ruin your future. There are several ways someone can protect themselves from extreme risk: emergency funds, insurance, and planning.

Types of Risk

Let’s cover more about this idea of risk. We all know our basic needs are food, shelter, and clothing. Without these, we would be in big trouble. In addition to these, our health is a basic need as well.


If there is a natural disaster, it can be difficult to replenish your food supply. Roads may be closed, so suppliers may not be able to restock stores. Or, maybe you won’t be able to get to the store.

Shelter and Belongings

Protecting your belongings comes into play when those assets are of value to you, and the expense of replacing them is high. Examples of these are your home, car etc. The following are risks to your assets:

  • natural disasters – tornados, hurricanes, earthquakes, flooding
  • fires — lightning strike, candles, faulty wiring, heater, cooking (cooking is the most common cause of house fires)
  • accidents to the property – car crash, damage to the home from another person


Our health and life are of great value to ourselves and our families. We need good health to be able to work and financially secure our future. The following are common risks to our health:

  • Sudden illness
  • Injury or accident
  • Chronic conditions – genetic or not
  • Past illness
  • Lack of preventative care
  • Age

Ways to protect against risk

Emergency Kit

An emergency kit can keep you safe and comfortable for a couple of days in the event of a natural disaster. Prepare an emergency kit with the following:

  • Always keep three days worth of canned goods and bottled water for your entire family in your home. Periodically check the expiration dates and replace canned goods as needed. Keep extra bottled water for cleaning etc.
  • Keep a radio and extra batteries.
  • Keep an envelope of cash in your emergency kit. In case of a disaster, ATMs are likely to be unavailable to you and credit card machines will not function as usual. Consider keeping $100-300 at a minimum in your emergency kit.
  • Essential documents scanned and saved on a USB drive. See this resource for a list of items you should scan. Keep the USB in the envelope with your money and also give a copy to a trusted person. Critical original documents should be stored up high off the ground in a secured container.

Emergency Savings Fund

An emergency fund is your first line of defense. You may have unexpected expenses enter your life when you least expect — so you need to be prepared ahead of time. For instance, you may have to take a last minute trip, the water heater in your home may break down, or you may be unable to work for a bit. How will you pay for your expenses when your budget has minimal excess income?

Your emergency savings fund should have three to six months of “must-have” expenses. Must-have expenses are those that you are committed to each month; they are more fixed in nature, and you can’t go without them. Here are some examples:

  • Mortgage payment
  • Groceries
  • Childcare
  • Home Utilities
  • Insurance – home, health, auto
  • Automobile gas
  • Minimum debt payments

The emergency fund can also secure you and your family in the event of a job loss or sudden job change. If you sense your employer is struggling or you notice more people than usual are getting laid off in your industry or city, it is a good idea to consider 9-12 months of expenses in your emergency fund. Changing jobs can be stressful, but you should recognize these common signs that your job may be in trouble:

  • Projects are cancelled or put on hold
  • More closed doors in the office and a management team that is unavailable
  • Focus on short-term projects without much communication about the long-term
  • Previously scheduled meetings get canceled or occur without you
  • Employee expenses are reduced, and budget becomes a focus
  • Cross-training becomes more of a focus for you or your team

Talk to your managers when possible if you begin to notice any of the above. Even if you don’t get the whole truth, you will likely get a better sense of what is happening. Keep checking in to stay in the loop as much as possible.

Even if you aren’t being laid off, but you want to change employers or start a business, you must plan for the transition. Think about the events that are coming up in your life and try to time your job transition to benefit you most. Avoid suddenly quitting your job and putting your finances in jeopardy.

Your emergency fund will help you to avoid going into debt or turning to credit cards unnecessarily. Commit a portion of your budget to building an emergency fund and set up ways to autosave. Autosave includes the automatic rounding up of purchases on your debit card, and the change will go straight to your savings account. These features are free and offered by most banks. Another way to autosave is to have a direct deposit going from your paycheck to your savings account: you won’t even miss it!


Some companies are in the business of helping us protect against the risks mentioned above, and they are known as insurance providers. You have heard their names: State Farm, Progressive, Geico, Aflac, Blue Cross Blue Shield, Aetna, etc. These insurance companies provide us ways to help pay for damages when an unexpected event occurs.

Some of the common types of insurance you can purchase are:

  • Health
  • Dental
  • Vision
  • Life
  • Auto
  • Homeowners
  • Flood
  • Renters
  • Disability
  • Long-term Care

An insurance contract is a promise to pay for a specified expense caused by a risk event. Insurance can be purchased on your own or through your employer. Let’s define some common terms related to insurance.

Premium – The cost of the insurance product. You pay for an insurance contract or policy in the form of a premium; if a person does not continue to pay their monthly premium, their insurance policy lapses and is no longer valid. Premiums are typically paid monthly but yearly or semiannually is also common.

Deductible – A person’s portion of an insurance claim. If a risk event occurs and you have an insurance policy for it, your deductible is the portion you will pay before the insurance company will come in and pay for the rest of the expense that is covered by your policy. Deductibles are typically quoted in the form of a dollar amount. For example, my health insurance states that I have a $2,000 deductible. I must pay that$2,000 for one or multiple services from my pocket before my insurance will begin paying for any expenses or treatments. Deductibles apply to all types of insurance products, not just health insurance.

Copay – A copay is a stated dollar amount an insured person must pay. In the case of health insurance I may have to pay $25 for any doctor visit,$50 for a specialist, and $250 for an emergency room visit. Regardless of my treatment or condition this is the set amount I have to pay to receive these services.

Coinsurance – The amount of money shared by the insured person and the insurance company. Coinsurance is typically listed as a percent of the fee charged and will go into effect after I pay my deductible. For example, my health insurance has the $2,000 deductible and 20% coinsurance. This means that if a treatment costs$5000 and I’ve not paid anything out of pocket for the year, I will pay $2000 (the deductible) + 20% of remaining$3000 and the insurance company will cover the rest. Sometimes, the coinsurance is stated as a ratio. In this case, it’s 80/20 – 80% paid over deductible is paid by insurance and 20% by me.

Claim – A bill you or your healthcare provider sends to the insurance company for services you received under the terms of your policy. The claim is the request to pay for covered costs above the deductible.

Exclusion – An item omitted from coverage. An exclusion from your policy means the insurance company will not pay for expenses related to a specific condition or event. Sometimes this is related to a pre-existing condition or a circumstance that puts you at a higher than normal risk for an event.

Policyholder – person who purchased the insurance policy.

Statistics and Cost of Insurance

Insurance companies offer insurance policies for purchase because there is some statistical chance that a risk event will occur to an individual. Several factors influence our chances that we will be involved in a risk event. These may include our age, where we live, our past, our family genetics, whether we are male or female, whether we own a home alarm, etc. Insurance companies can set their premium prices based on your specific statistical probability of a risk event happening to you and your current circumstances. They do this by asking you to fill a questionnaire before producing the insurance contract or policy.

As the chance of a risk event increases so will the cost of insurance. The increased likelihood of an event may or may not be something in your control. The insurance company can raise your deductible or place caps on the maximum amount of coverage you can purchase to help protect themselves from an increased likelihood of a claim.

Insurance can help protect your financial situation and help you reduce your worry about events that can harm you. Knowing you can pay for extreme expenses will help your sense of financial freedom. Many websites can compare insurance companies and their abilities to pay for claims; or are good ones. You should also read reviews about the insurance companies by consumers to get a better sense of their customer service. Do your research; it can save you a lot of hassle and time during an unfortunate event.

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