Risk: It’s Not Just a Board Game

“The fear of death is the most unjustified of all fears, for there’s no risk of accident for someone who’s dead?
–Albert Einstein

When I was a kid, I used to read Choose Your Own Adventure books. For those of you who are unfamiliar with the genre, you were the main character in a story. The first few pages were an initial vignette, and then you had to make a decision. If, for example, you went into the cave, you’d turn to page 33, but if you went to the lagoon, you’d go to page 52.

Occasionally, these choices spelled doom and gloom for your hero character. You’d step into a pit of monsters and that would be the end.

Except, of course, you could always go back to the previous spot and make a different decision.

Life rarely offers these opportunities to turn the page back and make different decisions. Once we’ve chosen, we’re forced to live with the consequences of our actions.

Most of the time, bad outcomes from our decisions aren’t truly that bad. We go to a restaurant where the waiter was surly. We buy cable packages with channels we never watch. The TripAdvisor reviews about the hotel we chose for our vacation were overly flattering.

Those are inconvenient outcomes, but we can shrug them off and move on with our lives.

Some outcomes, though, aren’t as easy to move on from.

Therefore, when we’re faced with risk and potential bad outcomes, we have three choices for how to deal with that risk:

  • Reduce the risk. Driving around on bald tires? Change the tires and reduce the risk of a blowout on the Interstate.
  • Accept the risk. Each time you step on a plane, you’re taking a risk that the plane is going to fall out of the sky. The chances are very low (though our limbic systems tell us that the risks are much higher), and it’s not like you can fly the plane better than the pilot, so you accept the risk and take that flight.
  • Insure the risk. When a bad outcome would be devastating to you or your family, you can pay someone else a small amount of money to pay up in the event that the bad outcome happens. It’s why we have health insurance, life insurance, auto insurance, homeowners’ insurance, long-term care insurance, and disability insurance.

As a financial planner, one of my primary goals is to make sure that you’re protected against bad outcomes. One of the biggest mistakes I see people make is accepting risks they should be insured against and insuring risks that they should be accepting.

For example, few people come to me with an adequate disability insurance policy in place. If you’re young, then one of the biggest risks you face is the inability to work, as it’s your income that provides the foundation for you to build a retirement nest egg. Yet, when we’re young, we think we’re Superman or Superwoman and will never get sick or injured. Those who do, though, do not have adequate protection.

On the flip side, people insure against risks that don’t really need insurance. They buy whole life insurance for their infants. They buy cancer riders on their life insurance policies (if your insurance agent tries to sell you cancer insurance, fire him). Agents who sell these policies play on your emotions and fears. Parents of newborns are scared about losing that bundle of joy. I’m scared to even hold infants lest I damage them! Most of us, somewhere deep down in our brains, have an irrational fear of dying of cancer. In 2018, 609,640 people died of cancer in the United States, which, while a huge number, is only about 20% of the overall death rate in our country.

Insurance and risk management is an enormously important topic, so that’s why I’ve volunteered to host the 195th Cavalcade of Risk.

What made the cut?

What made the cut?

Want to read more about my thoughts on insurance and risk? Check out some of these articles:

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