Risk Management and Insurance - Report Example

Word count: 1320 Order # 430839 Risk management and insurance Risk management is defined as a process in which a person or an is protected against the exposure to financial risk and market risks and economic value would be enhanced over a period of time (Trieschmann, 2000). Risk management is very important aspect in our life. Several times, the persons who are in good earning position cannot maintain their financial status due to some unexpected happenings and the lack of risk management further aggravates the situation. Risk management is a branch of economic science that deals with various aspects of risks associated with human life and evolves strategies to resist the risks that operate from time to time (Harrington and Niehaus, 2003). In other words, the knowledge of risk management helps people in stabilizing their financial comforts through out their life. It is nothing but long term planning of persons’ financial goals and necessary insurance cover for meeting these goals. Insurance can be defined as the equitable transfer of the risk of a loss, from one entity to another entity by the payment of money in the form of timely premium (Lynch, 1992). The organization or agency that sells insurance is known as an insurer and the person who subscribes to the insurance policy is known as policy holder. The risk management and insurance planning is quite useful for middle class people in efficient management of their available financial resources (Squires, 2003). In the present case study, The Goodberrys, Charles (35), Alice (37), children Candy (14) and Andy (11), come under middle-class generation and hence they require accurate planning for risk management and insurance. They require to take different types of insurance like auto insurance, homeowner insurance, liability insurance, health insurance and disability insurance. Let us analyze their financial goals first before planning the risk management. Present financial status and assets: Plan to purchase house Modest savings account Moderate investments Charles and Alice are job holders Financial goals of Goodberrys: To continue the present financial comforts in future after retirement Frequent international travel Ample time spending with family members Sufficient financial resources to support children educational needs in future Buying a family vacation home in Florida beach Retirement of Charles at the age of 55 To ensure comfortable financial resources for their children To provide estate for their children White paper on Risk management and insurance plan for Goodberrys for reducing the uncertainity and for preserving and growing their financial assets Based on the present financial status and assets of the Goodberrys, the following steps have to be taken for ensuring fulfillment of their financial goals: 1. The selection of the house to be purchased must be well planned in terms of unit amount of money to be spent and in terms of their space required for convenient living of not only four persons but also for their grand children and guests in future. 2. The home insurance has to be taken invariably which must cover it against the risk of fire and natural calamities like cyclones and earth quakes. This insurance scheme will also cover the loss of belongings inside the house if theft happens. 3. The auto insurance is required to be taken by the Charles and his family members which cover the damages to the car and theft in addition to the legal claims in case of accidents. 4. The liability insurance also has to be taken by the Goodberrys which would protect them against the expenses towards meeting the legal claims. 5. Charles and his family members are also advised to take credit insurance which protects them from any damage if occurs in future by repaying the balance amount left towards the payment of premiums. 6. The most important exercise that has to be done at this moment is to classify the assets of the Goodberrys and estimate the current worth. At the same time, the liabilities like bank loans have to be listed out and their total value has to be estimated. Based on this the net worth can be calculated by following formula: Net worth = Value of assets – Value of liabilities After estimating the net worth, the future value of the current assets has to be worked out which will take in to consideration of the depreciation of the assets and inflation factor over a period of time. This will give them an accurate idea about the exact amount required for meeting the expenses for daily maintenance and for paying the travel expenses and health insurance cost etc. The future value of present deposits in savings schemes can be calculated by the following formula : FV = PV * (1 + i) ; FV is the future value of present asset, PV is the present value i is the interest rate Hence, if Goodberrys deposit $100 at a 5% interest rate, the future value at the end of one year will be $105, which is determined as follows: FV1 = 100 * (1 + .05); Similarly, interest will be compounded over time, hence at the end of the second year, the value will be: FV2 = FV1 * (1 + i); This holds good for the bank interest rates for saving deposits. However, the rate of inflation decreases the value of the money and hence leads to the devaluation of money in future. Hence for purchasing any unit commodity, we may require higher amount of money in future than the current period and hence Goodberrys have to consider the inflation factor and accordingly their necessary financial resources to meet the future expenses have to be estimated. 7. Systematic investment plans that distribute the money payment every month can be planned for the money multiplication against the inflation. 8. Considerable amount has to be saved in savings bank account for meeting the immediate necessities like health, education and social functions. 9. Insurance for the children has to be prioritized which would be matured at the time of children’s higher education and marriage. 10. Retirement must be taken at 55 years and hence the pension plans have to be subscribed that suit the monetary requirement that suit the post retirement life. 11. Separate funds have to be saved in different diversified portfolios to take care of the investment risk and also to meet the travel expenditure in future. 12. Selection of ideal travel clubs that sponsor the tourist packages from time to time at reasonable costs is important. It will save considerable amount by provision of economically viable accommodation in almost all tourist spots. 13. Purchasing a family vacation home in future requires huge investment that cannot be met through only saving schemes. Hence they are strongly suggested to invest in small homes or residential plots that have great scope in multiplication of money value compared to savings schemes. 14. The residential plots have to be purchased from reputed real estate builders or from government owned housing schemes which can be utilized for the construction of estates in future for their children. 15. As the Charles prefers to take retirement at the age of 55 years, his time available for spending with other family members is quite adequate. However, Alice has to plan for her retirement from nursing profession by that time so that the time to be spent with their family members would be ideal. However, both Charles and Alice are recommended to start their own business or consultancy during their post retirement life which keeps them productively engaged along with the generation of sufficient funds for their future monetary needs. References: Harrington, S. and Niehaus, G. (2003). Risk Management and Insurance. Mc Graw-Hill Publication. P:704. ISBN-10: 0072339705. Trieschmann, J. (2000). Risk Management and Insurance. South-Western College Publication. P:656. ISBN-10: 0324016638. Lynch, M.E. (1992). Health Insurance Terminology. Health Insurance Association of America. ISBN 1-879143-13-5. Squires, G.D. (2003). Racial Profiling, Insurance Style: Insurance Redlining and the Uneven Development of Metropolitan Areas. Journal of Urban Affairs. 25: 4 : 391-410. Read More