Wealth Management & Financial Planning

Wealth Management & Financial Planning

Managing Risk

What do Motorcycles, Risk Management and Long Term Care Insurance Have in Common?

A recent surge in temperatures had motorcycles heading to the streets. Long time readers may remember I logged more than 30,000 miles on the back of two Harley Davidson’s in my 30’s. Alas, those days have passed.

A question was asked on my radio program about how to deal with long term care issues and the risk involved. You may wonder how motorcycles, risk, and insurance go together. When teaching risk management at Purdue University, I used the motorcycle example to explain risk management for understanding the risk involved with long term care insurance.

There are four things – and only four things – you can do in risk management. This is true of every risk you can imagine from asking a girl to prom, buying a stock or considering long term care insurance. Please note that even though these are all options, they may not be readily available for one reason or another.

Consider that we are in the winter season with a beautiful sky, warm air but wet roads covered with debris. One of the worse combinations for a motorcycle as leaves can be like glass on their underside in these conditions. Let’s assume I am considering pulling my Roadking Classic (how I miss that bike) out for a spin.

The chance of an accident is not likely, but the probability has increased due to weather issues. Now it is time to turn to our risk matrix for possible solutions.

First, I can retain the risk. I can apologize to my mother and simply go ride and accept the risk.

Secondly, I can avoid the risk. I can make my mother happy and leave the bike in the garage.

Third, I can reduce the risk. I can put a helmet on my head and ride only on streets well-traveled to reduce a chance encounter with the mischievous leaves.

Fourth, and final choice, is to transfer the risk. Typically, that is done via insurance of some nature.

All four options are available to me – at a price – but they are all on the table. That is not true of all risks you will encounter. Nobody will insure your dryness for instance on a rainy day if you have no umbrella.

Long term care insurance is an option no longer available in some states. That is because of the cardinal rule of insurance: you should only insure against (both the insurance company and the buyers should seek the same conditions) things that are not very likely to happen and very costly if they do happen. Low probability and high cost are the key.

Long term care insurance was grossly mispriced when it first came out for a host of reasons. The insurance industry had the numbers correct or so they thought. They were dead wrong though and many premiums have been raised to a point where owners had to cancel policies later in life.

Look at your risk. Ask yourself if you can afford the risk and is it worth retaining? If not, look to the other three but do know that things like premiums can change.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see our Disclosure page for the full disclaimer.

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