Managing Risk

1. Lesson 18 Managing Risk

2. "Denial is a common tactic that substitutes deliberate ignorance for thoughtful planning."Charles Tremper

3. Lesson 18 – Managing Risk Risk Defined A common definition of risk is “Any uncertainty which, if it occurs, will have an effect on achievement of one or more objectives.” This generic definition allows us to apply risk management to a broad range of activities, wherever we can define distinct objectives. This includes personal risk management, identifying and managing uncertainties that could affect achievement of our personal objectives.

4. Slide 18.1 Lesson 18 – Managing Risk It’s Risky Out There • What’s the risk in • Having a breakfast sandwich and a hot drink at a fast-food restaurant before school? • Driving to school? • Listening to your music or texting friends during class time? • Playing tennis after school?

5. Lesson 18 – Managing Risk What is personal risk management? • A well-constructed financial plan has two parts • Wealth creation is designed to build and preserve capital based on the assumption that you will have continued good health and live to a certain age. • Wealth preservation is known as risk insurance and is concerned with assessing your financial circumstances and ensuring that your assets and resources are protected. Risk insurance is a simple means of transferring risks from individuals who cannot afford to retain the risks, to insurers who can.

6. Slide 18.2 Lesson 18 – Managing Risk Flipping Out Over the Cash • Imagine that I have a brief case filled with $150,000 in cash. • Option One: You keep the cash. • You can have the $150,000 right now! No strings attached. • Option Two: Double or nothing. • Based on a double or nothing coin flip, you can have $0 if you lose the coin toss or $300,000 if you win. • Which option would you choose?

7. Slide 18.4 Lesson 18 – Managing Risk Auto Insurance • Auto insurance provides financial protection from losses due to an auto accident or other damage. • Types of auto insurance coverage: • Collision provides for the repair or replacement of the car damaged in an accident. • Liability covers the cost of property damage or injuries to others caused by the policy owner. • Comprehensive covers the cost of damage to an auto as a result of fire, theft, or storms.

8. Slide 18.5 Lesson 18 – Managing Risk Renters’, Health, and Disability • Renters’ insurance provides financial protection in case of loss of personal possessions in a rental unit due to theft, fire, water damage, and so forth. • Health insurance provides payment for certain health care costs. • Basic health covers office visits, lab work, hospital costs, and routine care up to a certain limit. • Major medical provides protection against catastrophic illness. • Disability insurance provides income over a specified period of time when a person is ill or unable to work.

9. Slide 18.6 Lesson 18 – Managing Risk Life Insurance • Life insurance provides financial protection to dependents of the policy owner when the policy owner dies. • Term life offers protection for a specified period of time. If you don’t die within that time, you don’t get the money (which is a good thing, remember?). • Permanent life offers protection that remains in effect during the lifetime of the insured and acquires a cash value. • Or you can purchase a variable plan which combines both.

10. Slide 18.3 Lesson 18 – Managing Risk Diversification Can Reduce Risk Diversification means replacing a single risk with a large number of smaller risks. Asset diversification means spreading your investment funds out over various investment options such as stocks, bonds, and mutual funds. Stock diversification means spreading stock ownership risks out over many companies of different sizes, in different sectors, and in different locations. Insurance diversification means spreading some of the other risks you face – arising from car accidents, theft, and fire – out over other insurance policy holders.