Tuesday, March 16, 2010

Life carries risks

Risk is involved in any situation in which some kind of loss or misfortune is possible. When you are exposed to the chance of loss or damage, whether personal or material, risk is involved. Risk is a part of life. The loss might involve any one of or a combination of the following:

• Financial, such as a $15,000 hospital bill for an appendectomy

• Physical, such as injury or death

• Material, such as a wrecked car, burned home, or a stolen handphone

Insurance is designed to protect against risk, because individuals who buy insurance are financially compensated in case of loss. Individuals who are concerned about potential risks pay insurance companies for protection against specific types of risk such as medical costs, car accidents, and many others. Purchasing insurance does not remove risk. It merely provides compensation for the loss and spreads the cost of sharing the risk.

Because insurance in intangible – you cannot actually see or touch what you are getting – some individuals are not motivated to purchase insurance. Risks are intangible, too, and many times are not realized until you experience a loss or survive a close call.

Risks, like life, depend on the circumstances that surround you. Although many individuals face similar risks, no one faces exactly the same risks. For example, although cars are fitted with air bags and seat belts to protect you in a collisions, someone who is 1.8m weighting 90kg will suffer different injuries than someone who is 1.7m weighting 50kg. Risk changes based on circumstances throughout your life. Your risks change as you become employed, change your marital status and number of dependents, and increase or decrease income and savings.

Dealing with Risk

There are several ways to deal with risk. For example, smoking is a risk-filled behavior. To deal with risks associated with smoking, you can choose to do one of the following:

• Avoid risk, by not smoking

• Reduce risk, by limiting the number of cigarettes you smoke

• Ignore risk, by smoking three packs a day

• Transfer risk, by buying health insurance to compensate you for medical treatment for conditions caused by smoking.

Dealing with risk by transferring it is the underlying principle of insurance. Insurance transfers risk.

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