Risk Management

There are five ways to manage risk:

a) Avoidance
b) Loss control
c) Retention
d) Non-insurance transfer
e) Insurance

Insurance is just one method of risk management. It is appropriate only for the low frequency and high severity risks, such as premature death or serious disability. We only need to insure against the "premature" occurrence of these events, as everyone will have to die eventually and it cannot be prevented.

Most people use a combination of avoidance, loss control and retention to handle most risks of high frequency or low severity. There is no point in insuring against these risks as the cost of insurance is rather high and it is quite a hassle to make a claim.

Retention means that you set aside savings to pay for the losses that are likely to occur. It is better to have savings to pay for medical expenses and retirement income when one gets old, rather than depend on insurance to pay these benefits. Sometime, when you need insurance to pay your expenses, you may find that your claim is rejected due to some technical reason.

An example of "non-insurance transfer" is when your medical expenses are transferred to your employer through the contract of employment.

To summarize, having adequate savings is as important as having insurance. It is better to pay a small premium to cover the risk of premature death, accident or disability and to save the money separately for future needs.

However, if the insurance policy provides a good return on your savings, compared to other types of investments, it is all right to save through an insurance policy. For this to happen, the expense and other charges for the insurance policy must be much lower than it is now. The "effect of deduction" should not exceed 15% of the accumulated regular premiums (compared to 40% that is taken away now by most insurance policies).