The basic methods to managing risk can apply to all facets of an individual's life. As the population continues to age, individuals encounter more risk with changing lifestyles, careers and health conditions, and the risks pertaining to health and life grow proportionately with age. Prudent risk management can pay off in the long run. Here is a quick guide to managing risk with a focus on health care and life insurance.

What Is Risk Management?

Risk accompanies all decisions in life. Pure risk is that which only entails the possibility of a loss with no potential for gain, such as an individual's well-being. This differs from speculative risk, which is taken for the opportunity to make gains, such as investing in the stock market. Managing pure risk entails the process of identifying, evaluating and subjugating risks to an individual's health and life. This is a defensive strategy to prepare for the unexpected. Determining how risk outcomes financially impact an individual if a potential risk becomes realized, and planning to mitigate such risks, is the purpose of risk management.

Aging Trends

People are living longer. The Centers for Disease Control and Prevention (CDC) reported that, as of 2014, the average life expectancy is 78.8 years in the United States, which is a 0.04% increase from 2013. Female life expectancy is 81.2% and male life expectancy is 76.4 years. According to the 2015 U.S. Census Bureau report, the 65 and older population is expected to double from 7 to 14% in 69 years, and triple to 21% in 89 years, domestically. With longer expected lifespans, risk management becomes a top priority.

As people age, their abilities, such as reaction time, stamina, immune system, body functions, senses and psychological stability, degrade. This makes them more prone to risks that may have been taken for granted at younger ages.

Health Care Insurance

Health care insurance pays for the costs of medical care, treatment and attention, including doctor fees, hospital and facility fees, prescription costs and various related services. The insured pays for this coverage through premiums, which may not be matched with the insured's employer. Insured members usually pay a co-pay and/or deductible when receiving medical services.

Life Insurance

Life insurance pays a set amount of money to the insured's beneficiary, or beneficiaries, upon death. The purpose of life insurance is to provide financial protection for the insured's beneficiaries, which could include family members. Term life policies segment the coverage by time limits. If the insured outlives the policy, there are no benefits to be paid out. Premiums get more expensive as the insured ages. Whole life insurance policies maintain stable premiums as well as an opportunity to build savings. When an insured opts to cancel his or her whole life policy, he or she can receive the determined cash surrender value. Individuals may also borrow against the cash surrender value.

The following are five basic methods to manage pure risk.

Avoidance

Avoidance is a method to mitigate risk by not partaking in activities that may incur injury, sickness or death. As one grows older, the list of activities continues to rise, as it becomes physically tougher to withstand damage from unforeseen accidents and events. The risk of death from lung cancer is 22 times more likely for male smokers and 12 times more likely for female smokers. Half of long-term smokers die before the age of 70.

Life insurance companies mitigate this risk on their end by raising premiums to over 400% higher for smokers than nonsmokers. That premium rises even higher as the individual grows older. Health insurers typically charge 15 to 20% higher premiums for smokers. Under the Affordable Health Care Act, also known as Obamacare, health insurers are able to increase premiums based on age, geography, family size and smoking status. The law allows for up to a 50% surcharge premium for smokers.

Retention

Retention is the acknowledgment and acceptance of a risk as a given. Usually this accepted risk is a cost to help offset larger risks down the road, such as opting to select a lower premium health insurance plan that carries a higher deductible rate. The initial risk is the cost of having to pay more out-of-pocket medical expenses if health issues arise. If the issue becomes more serious or life threatening, then the health insurance benefits are available to cover most of the costs beyond the deductible. If the individual has no serious health issues warranting any additional medical expenses for the year, then he or she avoids the out-of-pocket payments, mitigating the larger risk altogether.

Sharing

Sharing risk is often implemented through employer-based benefits that allow for the company to pay a portion of insurance premiums with the employee. Larger companies with more employees can negotiate even lower fees, due to the economies of scale that they bring to the table. In essence, this shares the risk with the company and all employees participating in the insurance benefits. Sharing is a method to drive down costs in order to minimize retention risk. Individuals may find it in their best interest to partake in sharing the risk with matching employer health care and life insurance plans.

This concept is a structural theme behind the state health insurance exchanges mandated by "Obamacare." The understanding is that with more participants sharing the risks, the costs of premiums should shrink proportionately. Whether the intended objective is reached is up for debate, as health insurance premiums continue to rise annually. From the health insurance company's perspective, the premiums from healthy members should offset the expenses for the ailing members. In the past, insurance companies could mitigate some of the risk during the enrollment process by limiting or denying coverage to individuals with pre-existing medical conditions.

By refusing to cover individuals associated with the higher medical costs, insurers were able to better manage costs. The exception was within group plans. Since Obamacare was signed into law in 2010, with major implementation roll-outs in 2014, insurers can no longer deny coverage based on pre-existing conditions or health reasons, with the exception of short-term health insurance. This has resulted in sky-rocketing costs that can only be mitigated by raising premiums across the board for all members.

Transfer

The use of insurance is the method of transferring risk from the individual to the insurer. Insurance companies assume the financial risk in exchange for a fee known as a premium. The contract between the insurer and individual is documented in the insurance contract. The contract states all the stipulations and conditions that must be met and maintained for the insurer to take on the financial responsibility of covering the risk.

Loss Prevention and Reduction

This method of risk control attempts to minimize the loss, rather than completely eliminate it. While accepting the risk, it stays focused on keeping the loss contained and preventing it from spreading. Health insurers encourage preventative care visits, often free of co-pays, where members can receive yearly check-ups and physical examinations. Insurers understand that spotting potential health issues early on and administering preventative care can help minimize medical costs in the long run. Many health plans also provide discounts to gyms and health clubs as another means of prevention and reduction in order to keep members active and healthy.

By accepting the terms and conditions and paying the premiums, an individual has managed to transfer most, if not all, risk to the insurer. The insurer carefully applies many statistics and algorithms to accurately determine the proper premium payments commensurate to the requested coverage. When claims are made, the insurer confirms whether the conditions are met to provide the contractual payout for the risk outcome.

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