17 Risks That Can Derail Your Financial Plan

Risk management can mean different things to different people. For some, it involves placing stop-losses on trades or rebalancing portfolios toward cash during a bear market. In financial planning, however, it’s about identifying risks to retirement and deciding whether to assume them or transfer them. One of the fastest ways to derail a financial plan is to ignore a risk, it materializes, and then face the financial strain it brings.

Life is full of unexpected challenges that can disrupt even the best-laid plans. A serious illness could prevent you from returning to work—or worse, result in death. The same could happen to a spouse, leaving you needing professional care and support, especially if they live with the condition for years. As we age, we may find ourselves in the “sandwich” generation, caring for both children and aging parents, or even helping nieces and nephews when family members face tough times.

Often, individuals and couples who have worked hard to achieve financial security through saving and investing may suddenly become responsible for other family members, either by choice or due to circumstances like a death in the family. I experienced this firsthand when I lost my sister-in-law to cancer a few years ago. My brother-in-law has since been raising two children on his own, balancing the roles of provider and caregiver. Fortunately, he has received a lot of support from family members, who have helped with childcare, housework, and various administrative tasks. Without that local support, his situation would undoubtedly be even more challenging. If he had insurance for his spouse, he might have been able to afford childcare while he worked. Like most couples, he thought that his own life, as the income provider, may be the only one that needed insurance coverage.

Disability is another risk that can devastate a financial plan. Not long ago, I worked with the adult child of one of my senior clients. She told me about her best friend, who, at 50, suffered a terrible fall at home and became permanently disabled. Without disability insurance, the loss of her income created severe financial hardship for her family, with no easy way to replace it.

Risks like illness, death, and disability are unpredictable but have the potential to upend lives. Ignoring them is not an option when it comes to sound financial planning. Health is one risk that can’t be transferred, but you can transfer the financial burden of lost income or care through insurance. That’s the purpose of life insurance—it's the "just in case" solution for the financial loss caused by the death of a loved one. While I strive to ensure my clients are protected against these types of risks, I also ask: Are their children or parents covered? In my experience, my clients' lives are deeply intertwined with their extended family, making this a critical consideration.

Health issues aren’t the only risk that can derail a financial plan. Personal liability is another significant threat. Last month, I attended a seminar led by an insurance agent with 15 years of experience. The session offered real-life examples, insurance strategies, and expert advice on managing personal liability.

Personal liability insurance helps cover costs if you’re sued for damages caused by you or your household members, including injuries, property damage, and even damage caused by pets. There are four key areas covered by personal liability insurance: bodily injury, property damage, personal injury, and legal defense costs. Those at risk for potential lawsuits include people who serve on charitable boards, have kids at home, own swimming pools or trampolines, have pets or large animals, manage family trusts, serve as executors of wills, employ household staff, rent properties, or frequently entertain.

One personal liability claim discussed during the webinar involved a Chubb policyholder whose dog escaped from their property and collided with a cyclist. The impact caused the cyclist to fall, resulting in injuries that required emergency surgery, a hospital stay, and subsequent rehabilitation. The case settled for $650,000 to cover medical expenses and pain and suffering, with the claim filed for failure to supervise the pet. Fortunately, their homeowner's insurance covered the incident. Yet another dog bite case study presented in the webinar was for a woman delivering mail wrongfully sent to her house. When she delivered the mail to the neighbor, she was bit. The woman won $5.6 million, and her attorney’s fees were also covered.

I had a similar experience as a teenager. I was babysitting with a friend while our parents attended a Bible study. My friend’s family had a pet chow, a dog that had always been well-behaved. However, one of the children got too close to the dog’s face, and in a moment of fear, the dog bit the child. The child had to go to the emergency room and eventually needed plastic surgery to repair the damage. These three cases highlight the importance of having a homeowner’s policy that includes pet coverage, if you own a pet.

Recreational vehicles also carry liability risks. Whether in the desert, on the water, or in the snow, I’ve always enjoyed recreational vehicles and understand the excitement they bring. However, they also pose significant risks for accidents. In my own experience, I’ve witnessed jet skis and boats colliding, motorcycles crashing mid-air, and, in one tragic case, an off-road vehicle flipping over, resulting in the driver’s death. Surprisingly, boat insurance is only required in two states, Arkansas and Utah, but it probably should be in all.

Unfortunately, many people underestimate the degree of risk in a liability lawsuit. The 2023 Chubb Wealth Report is a report that assessed 800 of its high-net-worth clients’ passions, investments, fears and risks. It states that damage awards are rising dramatically, especially for non-economic damages. The study talked about the influence of “Social inflation, which describes how the cost of claims exceeds economic inflation, comes out of shifting attitudes about who is responsible for absorbing risks…Another factor driving up the cost of settlements is the third-party litigation funding firms that provide funding to plaintiffs and their lawyers in exchange for a percentage of the settlement.” Last month's insurance presentation by Holistiplan highlighted various claims settlements, ranging from $150,000 awarded to a renter of which only $100,000 was covered by insurance to $49 million awarded to a 21-year-old who was left in a coma and expected to require lifetime care following a multi-vehicle accident in California.

Source: 2023 Chubb Wealth Report

In every financial plan I create or update, I evaluate property and casualty insurance coverage. The risks out there can quickly undermine even the best financial plans if not properly addressed. For my clients, I pay particular attention to risks related to recreational vehicles and children operating vehicles. It’s important to assess the situations that can legally, morally, or financially have an impact on one’s financial plan. The first step is to identify risks. The second is to quantify potential risks that can derail the financial plan. Finally, assess whether the risk can be transferred or assumed.

I find that many potential clients I talk to see the logic in transferring the risk by legal means through legal documents or insurance. Unfortunately, many also prefer to assume the risk and hope for the best. I’m an advocate for transferring risk as much as possible. It’s important during the financial plan to assess these risks for the threat they pose to one’s financial security, and personal liability and health aren’t the only threats we face. Here is a short list of 17 other risks that can negatively impact a financial plan:

17 Risks to Derail a Financial Plan

1. Health Insurance – Ensure all family members have adequate coverage, and plan for the cost of insurance if you retire before becoming eligible for Medicare, especially if you’ll no longer have access to employer-sponsored plans.
2. Pension – How secure is the income stream? Is the company well-funded and conservative with their balance sheet? Remember recent company bankruptcies for WorldCom and Enron?
3. Social Security – Maximize benefits as much as possible, especially if there’s a history of longevity in the family.
4. Concentrated Investments – Concentrating too much in your company stock and not diversifying holdings through time can result in higher risk to a retirement plan if the company files bankruptcy or has an event that causes catastrophic damage to the value of the stock.
5. Tax Allocation – As I wrote about in “The Power of Roth”, there are cases where individuals have piled up huge deferred-tax retirement accounts and when they’re required to take money out at age 73 or 75 under current law, can represent large risks to elevated income tax.
6. Homeowners Insurance – Be sure to have this reviewed annually as your household pets or property changes in value. I have found this particularly important given the inflation in housing prices and labor to reconstruct a home due to damage. Often, people don’t evaluate the cost each year to rebuild, and their coverage is well under the cost.
7. Umbrella Coverage – Often our net worth is above our home and auto coverage due to investments. It’s important to have adequate liability coverage and this is an area I often see lacking.
8. College Education – 529s are a great tool to plan for this and accounts can be transferred to grandchildren or used to start an IRA Roth for the child given the new SECURE Act provisions.
9. Teenage Drivers – lots of families unknowingly create liabilities with teenage drivers in the household by how they title cars and who’s insurance policy covers the driver.
10. Early Death – life insurance is needed to cover income lost from the early death of a spouse but can also be setup to help with the loss of a caregiver.
11. Long-term Disability or Illness – I advocate for long-term care insurance for clients over 50 based on how much assets they have. The cost of not having it and needing it can be detrimental to most financial plans. The Alzheimer’s Society says “a person’s risk of dementia increases as they age, roughly doubling every five years. That means that, of those aged over 90, around 33 in every 100 people have dementia.”
12. Rental Properties – there’s the risk that a renter is injured on your property and files a claim against you. Renter’s insurance is important, but there are other legal ways to protect your net worth such as how the property is titled.
13. Business Risk – There’s a reliance on the success of the business to provide income, but it can also pose a problem from an estate planning prospective. The success of the company or investment becomes a much larger factor, and a good plan will address this. Keyman insurance is another way to protect the business from the untimely death of a key employee such as the owner.
14. Recreational Vehicles – there’s a liability risk here as discussed earlier and can be transferred through appropriate insurance. Like rental and teenage driver risk, how the vehicles are titled can influence this risk.
15. Divorce – how to protect children should the parents remarry and comingle assets. This can be controlled by a proper estate plan that separates ownership of assets and can provide income-only to protect principal in some situations.
16. Outdated Estate Plan – laws change and so do family dynamics. It’s important to have these documents reviewed at least every five years. This includes not only trust documents but the other legal documents such as medical directives, wills, and power of attorney. This also includes beneficiary reviews annually.
17. Tax Optimized – we anticipate estate tax exemption to be a major topic of discussion over the next several years with the end of the Tax Cuts and Jobs Act and because the US debt continues to rise at an alarming rate. There are also inefficiencies we see where an estate was not optimized for taxes upon asset distribution to charities and children.

Not every risk can be transferred. We can’t anticipate war, natural disasters, or illness. It’s important to have proper life insurance for young families as they are still building their financial nest eggs. As we get older, concerns shift from replacing the capacity to create income, to protecting assets and income sources as well as assessing proper long-term care insurance if the assets aren’t there to cover these expenses – which can especially be the case for our parents who don’t have the means.

The list above is not exhaustive, but it at least is a good place to start an inventory for yourselves and/or with a financial professional. Risk management isn’t always just a stop-loss order, covered put option, or rebalancing a portfolio. It’s also reviewing the potential harm certain risks can impose on a financial plan by family, rentals, recreational vehicles, teenage drivers, outdated legal documents, concentrated investments, pensions, tax law changes, and more.

If this feels overwhelming, don’t hesitate to reach out to me to explore the option of creating a comprehensive financial plan. I encounter these risks regularly and managing them is a crucial part of the financial planning process. Any one of these risks, if ignored and realized, can significantly derail a family's financial stability. Let's work together to ensure you're prepared.

For a comprehensive review of your personal situation, always consult with a tax, legal advisor, or insurance agent. Financial Sense® Advisors, Inc., and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for tax, legal, accounting, or insurance advice. You should consult your own tax, legal, accounting, or insurance advisors before engaging in any transaction.

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