How to plan for the cost of loss

In the tenets of risk management there are just four strategic initiatives: prevent loss, mitigate loss, transfer loss, and finance loss.

Some losses can’t be avoided and there’s usually no one else willing to take it from you, so once that loss has happened all you’ve got left is figuring out how to pay for it.  And for that there are really just three financing options: using personal assets, taking out a loan, or using insurance.

So when you and your financial planner are working on your financial plan, incorporate a discussion on how you plan to pay for the consequence if you suffer an unexpected loss from the major categories of risks.  It can be made easier by following this template:

“If we face (insert loss scenario here) we’ll deal with the financial impact by turning to our (insert your personal asset, your access to a loan, or your insurance here).”

Now you’ve got something to work with because you can audit, measure, and test ahead of time whether your asset/loan/insurance will be sufficient, broad enough in scope, and efficient in its cost.  And if in doing so you find any part of your plan to be insufficient, you’ll have to decide whether you’re motivated enough to do something about it.

Photo: Rachael McGraw, Seattle