G. Risk Situations that Present the Possibility of Loss

In the process of establishing an insurance program, insureds must first identify their exposure to losses, along with the probability of how likely it is that a loss will occur and how "big" the loss might be. Certain risks, because of the severity of the possible loss, will demand attention above others.

For example, an individual who uses power tools to work on avocational woodworking projects is exposed to the possibility of hand injuries. If the individual is a brain surgeon, this would be considered a critical risk of financial loss, since the injury could prevent the person from performing the duties of their job. If the individual is, however, a radio announcer, the loss of hand function may be deemed a less "important" risk.

Exposures to possible losses should be ranked into appropriate groups and classified in the order of their importance:

• Critical risks include all exposures in which the possible losses are of the magnitude that would result in financial ruin to the insured, their family, and/or to their business;
• Important risks include those exposures in which the losses would lead to major changes in the person's desired lifestyle or profession; and
• Unimportant risks include those exposures in which the possible losses could be met out of current assets or current income without imposing undue financial strain or lifestyle changes.

In making a decision for establishing an insurance program, it may be wise to apply the following commonsense principles:

• Consider the odds;
• Don't risk more than you can afford to lose; and
• Don't risk a lot for a little.