What is personal financial risk management?
Personal financial risk management addresses one of the two key features of a well-constructed financial plan. These are wealth creation and wealth preservation. This post addresses ehe preservation aspect of the plan.
The objective of wealth creation is to build capital. The planning assumes that you will have –
- continued good health, and
- have an achievable timeframe available, in which to reach the goal.
Wealth preservation often involves transferring the risk to another party. This is in the event that something may happen, preventing you from meeting your long-term financial and lifestyle objectives.
Personal financial risk management – being strategic…
Wealth preservation in this context, takes the form of personal risk insurance. Your financial circumstances and ensuring that your assets and resources are protected, are the wealth preservation plan objective. Personal risk insurance is a simple means of transferring financial risks. It shifts the risks from individuals who cannot afford to (or choose not to) retain them, to insurers who can. Personal risk insurance is life insurance.
Who benefits from a personal financial risk management strategy?
A personal financial risk management strategy, utilising relevant and adequate insurance product, is important. It relieves you and your family of the financial burdens associated with the loss of income if an event occurs such as death or permanent/temporary disablement. It assures financial security and peace of mind to you and your family.
They are achieved by –
- providing an ongoing income source,
- funds for debt repayment,
- replacement housekeeper/nanny costs while your children are young, and
- possible funds to meet your children’s future education needs.
Why should a professional assess my risk insurance needs?
Professional assistance ensures that you acquire the correct type and amount of insurance. Your need for life insurance will include consideration of –
- your personal financial circumstances and objectives,
- lifestyle needs,
- number of dependants, and
- your age.
The type and amount of insurance cover in your protection plan considers these factors.
What types of insurance are available?
The types of insurance policies available are:
- Income Replacement insurance,
- Life (Death) insurance,
- Total (Temporary) and permanent disability, and
- Trauma (Critical Illness) insurance.
Income Protection and Salary Continuance
An income protection policy will pay you income in the event of being unable to work due to illness or injury. Income protection insurance replaces up to 75 per cent of your monthly income for a period up to the policy anniversary date prior to your 65th birthday.
Income protection provides quality cover and a variety of additional features. This gives added protection and helps you get back on your feet in the event of a claim. The premiums you pay on this type of policy are tax-deductible. Moreover, the income payments received under the policy will be assessable income for tax purposes.
Life (Death) Insurance
Life insurance provides financial protection in the event of death, and the cost of the insurance depends on the type of cover selected. A regular review of your cover is necessary to ensure you are not under or over-insured.
In determining the most appropriate policy, seek a balance between affordability and the most favourable policy conditions. To determine the amount of cover required, the following considerations are important:
- Current levels of assets and liabilities, especially the amount outstanding under a mortgage on the family home.
- Income required to maintain your family’s standard of living.
- Costs of a housekeeper, day care etc, should these services need to be provided.
- Costs of caring for a totally and permanently disabled person.
Life insurance such as term insurance provides funding –
- to repay debts,
- to cover dependants from the loss of an income provider, and/or
- to secure a business.
Total (Temporary) and Permanent Disability (TPD)
TPD is an additional cover to death cover. It is designed to provide a lump sum should you suffer an illness or injury which totally and permanently incapacitates you and prevents you from working again. TPD can be taken out to repay debts, to cover capital gains tax liabilities, and to cover dependants from the loss of an income provider.
Before purchasing a TPD contract, you should establish the circumstances under which the insurance company will pay a claim, as the precise definition of TPD and the conditions that must be met to receive compensation vary considerably with different companies.
Trauma (Critical Illness) Insurance
Trauma insurance is a lump sum payment for those who suffer a specified traumatic event, such as the diagnosis of cancer, coronary disease, etc. The specific purpose of this is to provide for medical treatment, child care, and debt management.
The benefit on a trauma policy is paid to you when the diagnosis is confirmed, not when you die of the condition. This is important because it provides you and your family with a lump sum to use at your discretion, when it is most needed. It may be needed to pay for the additional medical care, or perhaps to pay the mortgage to relieve the financial pressure on the household.
Why should you read and understand the contract?
When you take out insurance cover, you should obtain the policy contract and read it thoroughly to ensure you understand exactly what the policy insures you against. If you are unsure about any aspect of the contract, ask your financial adviser to explain anything that you do not understand. This will help you avoid any complications that may arise if you or your estate should need to make a claim on the policy.
Why participate in ongoing reviews?
As your wealth grows as a result of the implementation of your financial plan and your personal circumstances change, your need for insurance cover may decline or increase over time. Therefore, it is beneficial to periodically review your insurance cover.
Contact Us
Our professional services in respect of your needs for personal risk insurance protection are available now. To arrange an appointment with one of our experienced advisers, either –
- phone our office 07-34213456, or
- at your convenience, use the Book A Meeting facility.
The experienced advisers at Continuum Financial Planners Pty Ltd –
- will listen to your needs,
- confirm that they understand your situation as you are experiencing it – and
- have solutions to provide the protection you are seeking.
(This article was originally posted by us in Febriary 2010. We occasionally refersh/ update it, most recently in June 2025.)
