Welcome (back) to our Six Stones series. Our financial adviser, Jordan, is sharing as many tips, ideas and advice for people going through a divorce as a humble blog will allow. He’s staying away from specific financial advice – it’s all general advice over here, be sure to get personal financial advice before doing anything – but we hope you find some useful information in here as you navigate through/out of your divorce.
Now that you’ve done so much of the hard work:
– Identifying your risks
– Defining their impact
– Calculating your Gap
– Closing the Gap as much as possible.
You might still be left exposed, in some way, to the impact of these four disastrous events. So now there is one question for you to answer that exposure:
What do you want to do about it?
Your Five Options
Which takes us all the way back to the Five Risk Management Options we discussed in an earlier post:
Which of these five options will you choose to deal with the Gap you’re still carrying?
Now, ‘Exploiting’ this Gap isn’t an option.
And you’ve already worked awfully hard to Mitigate its impact.
Avoiding these risks is partially doable – eat better, live healthier, be more careful – but these risks are not, unfortunately, ones you can avoid completely.
Plus, the existence of a minimum-chips and a few dim sims makes entirely Avoiding them a little more challenging than it should be.
Which leaves us with Accepting the risk and Transferring it.
This means that you Accept that these events might happen and Accept the consequences if they do.
There is no further action taken, no additional steps or protections put in place after the point of Acceptance.
Most people know, when asked to think about it, that they’re Accepting the likelihood of these events happening. But very, very few ever acknowledge that they’re also Accepting the consequences.
“The government will cover it.”
“I’ll just access my super.”
“My family will help me out.”
None of these points indicate full Acceptance of the risks. They’re more a way of Accepting the likelihood, but delegating the consequences.
And that’s for people that have taken the time to consider these issues in the first place. Because most people haven’t, so while they’re Accepting these risks, they’re doing it unwittingly.
By not taking the time to work out their own, personal, position, they are – by default – accepting the impact these risks will have on their lives – and their loved ones.
OK, Opinion Time
Hopefully, by making it this far into this discussion, you know where I stand on this tacit acceptance.
But in case it hasn’t come through – I believe it’s irresponsible.
I believe that a fundamental part of being an adult is confronting difficult topics.
That when a problem has been identified, we should start taking the steps required to protect ourselves and our family from the impact of life’s inevitability’s.
I find it embarrassing that insuring our cars is widely accepted, but insuring our incomes is seen as a luxury.
This doesn’t mean I think everyone should have insurance.
What it means is that I think everyone should have taken the time to make a conscious, informed decision about these things.
And that involves educating themselves – as you have, by following along on this rambling discussion of risk – about what risk means for them, their family and their future.
Once that’s done, if their decision then is to continue Accepting these risks – fully aware of the potential impact they might have on their lives – then all respect to them.
It is, to simplify a far more complicated matter, similar to my thoughts on smoking (as a lifelong non-smoker): People know the risks going in now, so if they choose to roll those dice then fair play to them.
So long as they can accept the consequences, disastrous as they might be.
And, finally, we’re talking about insurance. Or, the transfer of the financial impact of a risk to a third party, to put it more formally.
Strip away all the legalese, jargon and shiny, smiley advertising, and insurance is fairly simple.
Insurance Made Simple
It’s a way for a group of people to ‘pool together’ their resources to provide for the financial impact of a certain event. Some people might never see a benefit from their contributions, but we can’t predict the future so we don’t know who will need it, and who won’t.
Say you, I and 98 other people pay an insurer to cover the financial impact of an event – being diagnosed with cancer, for example.
We all ‘buy’ equal amounts of cover, make it $10,000.
And it costs us $1,000 each for a year of cover. The insurer receives $100,000 in the first year.
5 of us are diagnosed with cancer so the insurer pays out $50,000 in total claims that year.
The insurer takes the other $50,000 and uses it to cover their costs and also – in a good year – bank the difference against future claims.
They bank some profit to stay in business and it continues on to the next year.
This is, naturally, a gross simplification of a truly wonderful human initiative, but I think it helps explain the concept.
I’ll explore it in more detail in the next couple of posts, but for now it’s worth taking a sidestep to discuss where insurance should fit in your financial life.
The Wrong Way Around
Where does insurance fit in your financial ife?
Well, here – the back end of an informative discussion about the risks you face and the impact they could have on your life.
So often people in my game have had this arse-backwards, starting by trying to flog an insurance policy to somebody that has never really considered their own personal risks.
It is, far too often, about making the situation fit the product, rather than the right way round.
Things are changing, but make no mistake – financial advice in Australia is defined by the sale of a product.
So much so that, thus far in this book – some 15,000 words – I have yet to write anything that would be classed as financial advice in Australia.
All of which has combined to make the public at least a little distrusting of anybody talking about insurance.
What I’m trying to here, though, is put insurance in its proper context – as part of an overall risk management plan.
Just ‘buying life insurance’ won’t give you peace of mind anymore than wearing sunglasses will make you Steve Carell.
Instead, if you put it at the end of the process, as a way to deal with the final, residual Gap in your risk management plan, then it can play a starring role.
Because by paying an insurer to take on the financial impact of one of these risks occurring you are Transferring that Gap to their wallet.
And by making the arrangements we’ve talked about to first Plug, then Close the Gap, you can know that the amount of insurance you’ve arranged is appropriate for your circumstances.
My next few posts will be all bout the information I think you need to know to make informed decisions about insurances. And I’ll try to make it more interesting than it sounds!