Risk management is the identification, analysis and economic control of risks that threaten the assets or earning capacity of an enterprise or individual. It is an important aspect of financial planning that can provide relief and comfort in the event that something unfortunate happens to you, for which you have carefully insured yourself against.

Some of the personal risks you may encounter include:

• Premature death
• Total & permanent disability
• Contracting critical illness
• Income needs in retirement
• Children’s education funding
• Parent’s long-term care

To put it briefly, you may die too young, live too long, succumb to illness or disability.

Insurance is a risk transfer mechanism by which an individual or organisation can exchange its uncertainty for certainty. The individual agrees to pay a fixed premium and in return, the insurance company agrees to meet any loss that falls within the terms of the policy.

Insurance planning should be based on the ‘Large Loss Principle’, which means, insure low frequency but high severity risks. For example, insure for critical illnesses such as cancer or heart attack, which occur probably just once in a lifetime (low frequency) but when it occurs, the financial loss is severe. It is worthwhile taking out insurance for such illnesses but not for the common flu or for visiting the panel doctor that may costs RM40. Risk is essentially a combination of likelihood of event and the severity should the event occur.