Financial Plan Project
With supportive research, develop a two-page essay that addresses how insurance can help to mitigate risk when developing a financial plan for your future; Insurance Mitigate Risk
Assignment part 1-Insurance Mitigate Risk
Risk management and its importance
When it comes to personal finance, risk management is crucial as it helps identify and even monitor risks to ensure that they do not negatively one’s future. Decision-making regarding personal financing requires one to consider factual information instead of making financial decisions based on emotions (Bhatt, 2022). Risk management is crucial as it helps one to be prepared for any expected or unexpected occurrences, ensure future financial stability, and even protect one’s loved ones.
Types of risk and how to manage them
There are four main types of personal finance risks: income, asset, expenditure, and credit or debit risk. Income risk affects someone’s ability to make money. One can get some disability, get laid off, have an accident, or become sick, making it difficult if not impossible to earn an income. Income risk can be managed by diversifying one’s skills and investments (Bhatt, 2022).
Diverse skills help ensure that if one is fired, it is easier to get another source of income while diversifying one’s investment portfolio helps ensure that one has a stable source of passive income. Young people who are just finding their footing in the real world often encounter expenditure risk, in that they spend more than they earn. This can happen when the income is too low, or when someone is experiencing an emergency. However, expenditure risk can also be experienced if someone is a poor spender (Bhatt, 2022). Managing expenditure risk includes creating a budget and minimizing spending.
Any asset or investment that one has a risk of depreciating. Assets can easily be destroyed or stolen. When income is affected, asset risk is more likely to be experienced. The best way to manage asset risk is to insure assets against theft, losses, or damage. Young people find themselves unable to pay debts such as student and car loans. To avoid this risk, one has to avoid debts and consider their financial position and choose a credit that won’t cripple their finances.
Appropriate insurance coverage-Insurance Mitigate Risk
At this stage of my life, the most appropriate insurance coverage is life insurance. I do not need health and property (car) insurance at the moment since through the Affordable Act, I can stay on my parent’s insurance until I turn 26. My parent’s home is still my permanent residence, meaning that it is easier to have one auto insurance cover for the family. However, I do need life insurance since buying this insurance at a young age helps ensure I get lower premiums (Dickler, 2019). It also ensures that my family does not get to struggle with my debts if anything happens to me. Other than death benefits, I can use the cash value to pay for major expenses such as a car or a home later on.
Impact of Insurance on Taxes
Insurance impacts taxes in various ways. Life insurance is tax-free, meaning that in case one dies, the family will not have to deduct any money for taxes. Some health insurances are tax-free, and so are disability insurance premiums. However, insurance can impact taxes in other ways other than just through the premiums. For instance
Disability insurance
Disability can make it difficult for one to earn a living, which is why it is crucial to have disability insurance. Short-term disability insurance covers someone for a short period, mostly less than one year. The intermediate insurance covers someone for at most two years while the long-term one covers someone for many years, either to retirement or even life (Yun & Li, 2019). Currently, I would want intermediate disability coverage since I am involved in various sports activities and that means I am at risk of getting injured. The only barrier to getting this insurance is that it is expensive for me at the moment.
Part 2-Insurance Mitigate Risk
The journey to insurance shopping will begin by visiting various insurance companies and comparing their policies. Various insurance companies offer different benefits and premium rates (Hero et al., 2019). I would need to take time to go through different companies and choose the best fit for me. Depending on the outcome of this comparison, I can choose to keep the company that my employer had bought my insurance in before. If I choose to keep the current company, I will have to notify them that I will be paying from now onwards and pay the administration cost.
Some insurance companies concentrate on a particular cover while others can offer all three covers. Getting a company that offers all three would be helpful and easier. However, I will need to speak with my financial advisor before I settle on one company. My advisor can help me to review the benefits and choose what is best for my family (Hero et al., 2019). My family will also need to have a family health plan since it will be cheaper than each person having a different plan.
I would choose the option that meets the family budget. Without the benefits, my income is slightly reduced. Working as an independent contractor also means that I am exposed to income risk, meaning that I will need an insurance option that meets the needs of my family but also falls within the budget.
References
Bhatt, V. (2022, April 22). Here’s why risk management is important while planning your finances. Free Press Journal. https://www.freepressjournal.in/business/heres-why-risk-management-is-important-while-planning-your-finances
Dickler, S. E. (2019). Here’s why you should buy life insurance when you are young. CNBC. https://www.cnbc.com/2019/10/19/heres-why-you-should-buy-life-insurance-in-your-20s-or-30s.html
Hero, J. O., Sinaiko, A. D., Kingsdale, J., Gruver, R. S., & Galbraith, A. A. (2019). Decision-making experiences of consumers choosing individual-market health insurance plans. Health Affairs, 38(3), 464-472. https://doi.org/10.1377/hlthaff.2018.05036
Yun, Z., & Li, X. (2010). Investment planning factors and risk management in personal financial planning. 2010 International Conference on Management and Service Science. https://doi.org/10.1109/icmss.2010.5576131