Risk Management

Risk Management is the most important and vital in Personal Financial Planning. Without proper Risk Management  financial planning can become hay wire.

Risk management is intended to provide financial security through the use of financial strategies, tools and services. These are used in the attempt to mitigate large financial losses if and when they occur. A comprehensive risk management strategy will include the consideration of personal, property and liability risks.

What is Risk?

Every one of us faces the risk every day. while driving the car, crossing the street, eating out in restaurant,breach of trust, causing loss to some one’s property etc,

Managing Risk can be done by several ways once you identify it and quantify it in terms of money.

1. prevent it — by, for example, practicing good fire safety
2. avoid it — by, for example, hiring a professional to trim your trees
3. spread it — by, for example, backing up your computer files and keeping the copy at a separate location
4. retain it — by assuming that certain losses are just unavoidable costs to be absorbed
5. transfer it — by sharing the risk with an insurance company
6. In most cases, risks that you can’t readily handle or predict are best transferred to a reliable insurance carrier rather than retained by you. There are various kinds of personal and/or commercial  insurance such as Home Owner’s, Personal accidents, Automobile Insurance Life Insurance,Critical Illness,Health and Business Owner’s coverage, Fire , flood. These products can protect you from varying degrees of risk depending on the likelihood or probability of an adverse occurrence. From the  Probability computations and ability to reckon the chance of perils and hazards will set the market price for your insurance coverage.

Ideally, your risk management plan should address all risk factors, including:

1. the risk of death; Life Insurance
2. the risk of disability; Accidental Insurance
3. the risk of illness; Health and critical illness Insurance
4. the risk of damage or loss of property; House property, fire and flood etc Insurance
5. the risk of owning and using an automobile;  Automobile Insurance and Third Party
6. the risk of causing injury to another’s person or property. Third party.

The risk of liability  Insurance

There are various kinds available.

Life Insurance:

In Urban areas most of the families where couples both are working and contributing for the income of families. When evaluating the life insurance component of your financial plan, it is important to consider the financial impact of the death of either (and both) spouses.

The first question depends on what you’d like to provide for your family if you die.

1. Do you want them to be able to pay off the mortgage?
2. Do you want to provide college educations for your children?
3. What sort of financial buffer do you want to give them?
4. Do you want them to continue the same life style they are living right now?
5. The next question is what kind of insurance do you need?

Two important factors are

How much life insurance you need and what kind is best for your situation.

There are basic two type of insurance Term and Cash Value.

1. Term insurance is the simplest form and is written for a specific period of time (1, 10, or 20 years). This type of insurance is suitable for a short period of time, for instance, when children are young and there is higher liabilities and less surplus to buy cash value plans.
2. Whole life insurance has a level premium, level coverage (death benefit), and accumulated bonus or cash values. The cash value usually increases based on the insurance company’s general assets account portfolio performance, and some portion of the increases are guaranteed. It is suitable for long-term obligations, such as a surviving spouse’s lifetime income needs, estate liquidity, death taxes, or funding retirement.
3. Endowment Plans are for specific periods and can be used for various plannings such as child education, marriage, retirement corpus, It has insurance coverage and some part of the bonuses are guaranteed , There is specific maturity period so it can be useful for special purposes.
4. Unit Linked insurance Plan are where the investment of the part of the premium is invested in stock Market, Money market as per the Government guideline etc where there is probability of return is high but the risk is also on higher side.

Having enough emergency cash during difficult times can alleviate stress as well as help pay the bills. Regardless of the amount of income you earn or the size of your investment portfolio, it is important to have 3–12 months’ cash available  so that Monthly Expenses can be taken care of without stress.The necessary amount is determined by many factors including debt obligations, employment stability, elimination period for insurance policies, and accessibility of other investments. Despite the often repeated mantra about having a rainy day fund,

 While risk management planning may be less exciting than planning for your retirement or children’s education, solid risk management protects you, your family, and your assets.

If you are a Business Owner you face an additional Risk.

A Health Insurance Policy would normally cover expenses reasonably and necessarily incurred under the following heads in respect of each insured person subject to overall ceiling of sum insured (for all claims during one policy period).

1. Room, Boarding expenses
2. Nursing expenses
3. Fees of surgeon, anesthetist, physician, consultants, specialists
4. Anesthesia, blood, oxygen, operation theatre charges, surgical appliances, medicines, drugs, diagnostic materials, X-ray, Dialysis, chemotherapy, Radio therapy, cost of pace maker, Artificial limbs, cost or organs and similar expenses.

Sum Insured
The Sum Insured offered may be on an individual basis or on floater basis for the family as a whole.

Cumulative Bonus (CB)
Health Insurance policies may offer Cumulative Bonus wherein for every claim free year, the Sum Insured is increased by a certain percentage at the time of renewal subject to a maximum percentage (generally 50%). In case of a claim, CB will be reduced by 10% at the next renewal.

Cost of Health Check-up
Health policies may also contain a provision for reimbursement of cost of health check up. Read your policy carefully to understand what is allowed.

Minimum period of stay in Hospital
In order to become eligible to make a claim under the policy, minimum stay in the Hospital is necessary for a certain number of hours. Usually this is 24 hours. This time limit may not apply for treatment of accidental injuries and for certain specified treatments. Read the policy provision to understand the details.

Pre and post hospitalization expenses
Expenses incurred during a certain number of days prior to hospitalization and post hospitalization expenses for a specified period from the date of discharge may be considered as part of the claim provided the expenses relate to the disease / sickness. Go through the specific provision in this regard.

Cashless Facility
Insurance companies have tie-up arrangements with a network of hospitals in the country. If policyholder takes treatment in any of the net work hospitals, there is no need for the insured person to pay hospital bills. The Insurance Company, through its Third Party Administrator (TPA) will arrange direct payment to the Hospital. Expenses beyond sub limits prescribed by the policy or items not covered under the policy have to be settled by the insured direct to the Hospital. The insured can take treatment in a non-listed hospital in which case he has to pay the bills first and then seek reimbursement from Insurance Co. There will be no cashless facility applicable here.

Insurance companies offer various other benefits as “Add-ons” or riders. There are also stand alone policies that are designed to give benefits like “Hospital Cash”, “Critical Illness Benefits”, “Surgical Expense Benefits” etc. These policies can either be taken separately or in addition to the hospitalization policy.

A few companies have come out with products in the nature of Top Up policies to meet the actual expenses over and above the limit available in the basic health policy.

Exclusions

The following are generally excluded under health policies:

1. All pre-existing diseases (the pre-existing disease exclusion is uniformly defined by all non-life and health insurance companies).
2. Under first year policy, any claim during the first 30 days from date of cover, for sickness / disease. This is not applicable for accidental injury claims.
3. During first year of cover – cataract, Benign prostatic hypertrophy, Hysterectomy for Menorrhagia or Fibromyoma, Hernia, Hydrocele, Congenital Internal diseases, Fistula in anus, piles, sinusitis and related disorders.
4. Circumcision unless for treatment of a disease
5. Cost of specs, contact lenses, hearing aids
6. Dental treatment / surgery unless requiring hospitalization
7. Convalescence, general debility, congenital external defects, V.D., intentional self-injury, use of intoxicating drugs / alcohol, AIDS, Expenses for Diagnosis, X-ray or lab tests not consistent with the disease requiring hospitalization.
8. Treatment relating to pregnancy or child birth including cesarean section
9. Naturopathy treatment.

The actual exclusions may vary from product to product and company to company. In group policies, it may be possible to waive / delete the exclusions on payment of extra premium.

No short period policies

Health insurance policies are not issued for less than one year period.