My work is basically about helping people manage risk. That being primarily the hazards of life we all experience on a day to day basis. And it’s a risky business because life itself can be risky. Whether walking across the highway, being diagnosed with a catastrophic medical expenses or having an unexpected loss of income due to a sickness or injury, there are all kinds of perils that each of us face. As we have seen particularly over the last few years, the risks of life can also cause a good deal of anxiety with our money and savings, as well. For example, placing money in too risky of an investment or the fear of outliving one’s income can be quite unnerving. Then again, take the word LIFE itself; the two middle letters of this word “IF” says it all.
So, unless forced to live 24 hours a day in an 8×10 foot cubicle, each of face various perils if we live any type of active life, at all. Dealing with these risks lies with understanding the rules of the game — known in our business as risk mitigation — which is nothing more than reducing our exposure to the risks of life.
But making good, informed financial decisions these days to guard against risk can be extremely difficult. I attribute a good deal of this to the pace of our lives today, where, with both spouses working, there oftentimes is neither time nor energy to make good, rational decisions. The result for many, where simply trying to make good choices, is the whole process becomes one big source of confusion.
With this in mind, I thought it might be interesting to look at varying forms of risk as they relate to financial products today. Viewing these items in a broader overall context could help improve your own financial wellbeing:
>> Market risk: This can be especially important with products classified as “variable” where downturns and reversals in the market can create stress with the performance of the financial instrument
>> Interest rate risk: Today, increasingly, there are situations where the performance of a product is “tied” to the interest sensitive nature of the financial product. Do you understand that risk?
>> Pricing risk: Can today’s pricing of the product be supported for the next 10 to 20 years? For example, many insurers offering cancer policies and long term care coverage have had problems with rate increases. So have carriers in the disability income area. You need to know; is the financial product priced to last?
>> Longevity risk: With people living longer, is the product able to handle the increasing risk of longer life spans?
>> Morbidity risk: As with mortality statistics , there is also a risk that more people will be experiencing periods of disability — and, potentially, as statistics point out at later stages in life. The classic example of this is purchasing a home. Statistics point out that almost half of all mortgage foreclosures result from a disability to the homeowner. Is protection against this type of risk important to your peace of mind?
>> Complexity risk: Financial products are increasingly complex today with complicated pages of fine print to sort through. Do you fully understand these types of products . . and the risk they carry? Another question to ask; will the Advisor making the recommendation be around to service this product down the road? Better to know this on the front end.
>> Regulatory risk: Will this product “pass the mustard” with taxation and regulatory issues. The greatest product in the world is useless if you have to worry about adverse regulations down the road.
Hopefully, these concepts can provide clarity with the financial issues you may face in the days ahead. Adding a good portion of luck to the process always helps. Most important here is making sure you’re equipped with the necessary knowledge and understanding to make the right choices as well as be able to live with the results . . . .
This Month’s Parting Shot: Al Davis, long time, flamboyant owner of the Oakland Raiders who recently died apparently did enough estate planning before his death to allow the franchise to remain with his family. This contrasts to what happened to the family of Joe Robbie that was forced to sell the Miami Dolphins back in the 1990s to pay Robbie’s federal estate tax bill. Forbes magazine had Davis’ holdings at some $900 million with a potential federal estate tax estimated at over $175 million dollars. Talking about this kind of money owed reminds me of the famous quote from Mark Twain, who said, “The only difference between a tax man and a taxidermist is that the taxidermist leaves the skin.”