What is Risk in Regards to Insurance?

Kevin Wenke

Kevin Wenke

Owner at Decision Tree Financial. CFP. CLU

For Insurance, financial risk can simply be defined as uncertainty regarding financial loss.

The possibility of property and assets being lost or destroyed, such as this destruction of a home due to a fire or the loss one’s ability to work due to a disability, are examples of risk. 

An individual or businesses negligence or carelessness can increase the possibility or injury or damage of property to occur. 

For example, developing a medical condition because of a poor diet is another example of an increased risk, as is the loss of family income due to the death of a breadwinner due to a car accident while speeding.

The consistent with all of these risks is that they have the potential to decrease (or even eliminate completely) the value of the property or asset affected.

Risk can be divided into two classes:

Speculative risks involve the chance of both financial loss and financial gain. For example, betting on the horses at the racetrack or playing blackjack in a casino are both speculative risks.

You could win or you could lose. If you win, you’re happy and you have more than when you started. If you lose, you have less than when you started.

On the other hand, pure risk involves only the chance of loss. There is never the possibility of any type of gain or profit. Only pure risks are insurable, and this is an important point to consider. Many people feel that buying insurance is a form of gambling.

However, if you lose your home or if you lose your ability to work and earn a living, an insurance company WILL NOT provide you with more money than you stand to lose from the risk

The insurance company will not give you more than the value of your home when it comes to homeowners insurance and they will not give you more income than you were earning before you became disabled when it comes to disability insurance. learn how to treat risk in your life.

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