Catastrophic risk refers to low-probability but high-consequence events which have the power to turn our entire world upside down. Nassim Taleb popularized the term fat tails to describe this phenomenon. A fat tail event is a rare and unexpected occurrence that deviates significantly from the average or typical situation. These events happen more frequently than predicted by standard statistical models because traditional models often underestimate the likelihood of extreme outcomes.
While the term "catastrophic risk" conjures images of large-scale natural disasters or economic meltdowns, it's crucial to recognize that these risks also manifest on a personal level. For individuals and families, certain events can be deeply destabilizing. These personal financial setbacks can dramatically alter the trajectory of one's life, shattering financial stability and rendering previously laid plans obsolete. It's essential to understand and be prepared for these personal crises.
Here are just some financial catastrophes:
- Temporary or permanent disability
- Job Loss
- Investment losses
- Medical emergencies
- Identity Theft
- Legal Troubles
The list can go on and on. Warren Buffett once said "It's only when the tide goes out that you learn who's been swimming naked." It seems absurdly obvious, but we only know who has prepared for catastrophic risk once something terrible happens.
Lets go over some ways we can mitigate these catastrophic risks.
Life insurance, at its core, is a financial contract designed to provide monetary support to the insured's beneficiaries upon their passing. Depending on the policy type, it can be a source of savings or a payout. Your death can pose a catastrophic risk to those who financially depend on you. Your family can go from living the good life to living out of their vehicle without your income. Plan accordingly.
There are two types of life insurance - term and whole. Term life insurance provides coverage for a specified period, and if the insured dies during that term, a death benefit is paid out. Whole life insurance offers lifetime coverage and includes a savings component known as cash value, which can grow over time. While term insurance typically has lower premiums, whole life offers lifelong protection and potential investment growth.
I have term life insurance. If I die prematurely, within the policy term my family gets a payout. I pay a monthly premium, and if I don't pass away within the term, there's no payout - a deal which I will take every single time.
Disability Insurance (Own Occupation)
Disability insurance steps in when an individual becomes unable to work due to an illness or accident. It provides a portion of the insured's income, ensuring financial stability during recovery periods.
Own occupation disability insurance is a specialized form of disability coverage tailored specifically for professionals, often those in specialized fields like medicine or law. Instead of merely covering disabilities that prevent you from working any job, this insurance pays benefits if you're unable to perform the specific duties of your chosen profession. For instance, if a surgeon develops a hand tremor and can't operate but can still teach, this policy would provide benefits.
As for its cost, it varies based on factors such as the individual’s age, health status, chosen profession, and desired coverage amount. Generally, however, own occupation disability insurance tends to be more expensive than general disability policies due to the precise and comprehensive protection it offers. Even though it costs more, this policy is generally for higher income professionals who lose their ability to generate above average income - think along the lines of a surgeon who develops tremors.
I do not currently have an own occupation disability plan, but I am looking into several.
Umbrella insurance is supplementary liability insurance. It provides coverage beyond the limits of basic policies, offering protection against major claims and potential lawsuits.In scenarios where the liability exceeds the coverage of standard insurances, umbrella insurance acts as a buffer, protecting assets and ensuring that one's financial foundation remains intact.
These policies are typically only a few hundred dollars a year and provide at least a million dollars of additional coverage. For the price and the coverage, this one is a no brainer.