Some things in life cannot be controlled. Economic downturns, health problems, accidents--any of these occurrences can negatively affect our savings and/or ability to earn an income and therefore cause our finances some distress and affect our quality of life, both now and in the future. Financial risks exist because we are surrounded by potential events that can harm our income and investments, and this is one reason why there is insurance.
Risk of Early Death
There can be no greater potential financial catastrophe for a family than the untimely death of the primary wage earner. This can result in the immediate loss of a family's income; moreover, the death of a non-working spouse can cause the family's expenses to increase while the head of household searches for ways to continue maintaining the home and caring for any children. The main reason why life insurance is sold is to provide protection against this risk and replace the income that has been lost forever, or help defray the increased costs associated with the death of a caregiver.
A severe illness or accident can hamper your ability to go to work and earn an income. Furthermore, the uncertainty of if and/or when you can return to work could unfavorably impact your finances. If you have little or no money in savings available to continue paying your bills, your inability to earn an income can become as crippling as a death. This risk can be covered with disability or critical illness insurance so that the income is replaced when a breadwinner is temporarily laid up and cannot bring in a salary.
When you retire, you will be faced with the fact that you are no longer receiving an income. The main reason for investing is to save enough money to replace that lost income. Not saving enough money or suffering significant investment losses are both financial risks that can affect your standard of living during retirement. Constructing a well diversified and properly funded investment portfolio is vital for a comfortable retirement.
Property Damage Risk
A house fire or a car accident that causes significant damage or total destruction of your property can create a significant drain on your finances should you find yourself without adequate insurance protection. The loss of your home can be especially devastating without financial protection since it may leave you with a large unpaid mortgage to service or the burden of purchasing a new home with less than adequate funding.
Personal Liability Risk
If an action on your part causes harm or a financial loss to someone else, or if someone is injured while on your property, you may be held financially responsible and forced to reimburse the victim for any expenses or emotional distress caused by the financial loss or injury. Causing an auto accident, for example, may have negative financial consequences as you make compensatory reparations to the injured parties and/or their damaged property.
Philippe Lanctot started writing for business trade publications in 1990. He has contributed copy for the "Canadian Insurance Journal" and has been the co-author of text for life insurance company marketing guides. He holds a Bachelor of Science in mathematics from the University of Montreal with a minor in English.