When a potential financial risk is too great, insurance is key. However, insurance should also be considered as part of your overall financial portfolio. It can be negatively correlated to the other main asset classes, such as equities and bonds, so it need not follow market trends. It can also be an important way to leverage your assets in your later years.

Insurance is an important risk management tool. The first step is to properly assess your possible risk exposures. Most people are aware of potential cost in damages to their property and contents.

A frequently overlooked large risk is personal liabilities associated with accidents, especially from activities in the United States. The largest financial risks are actually from long-term disability or death and the loss of family income that results. There are several insurance choices to address these exposures. The manner in which they are selected and monitored is part of an asset allocation decision.

Look at it from the big picture of you overall finances. As you would have a personal investment policy statement, you also need an insurance policy statement. It should consider your resources versus your risk tolerance in meeting your financial goal.

This gauge will be the guide for selecting the right product or policy in insurance terms. Life insurance products are the policies with the largest financial ramifications.

Like investments, there are risk classes within the products available for life insurance: conservative, balanced, and aggressive.

The conservative approach is to use term or whole life insurance, with guaranteed death benefits. Term insurance only lasts a targeted period and does not accumulate a cash balance. Whole life policies are written to cover your lifetime and do grow as an asset, however they must be kept 'in force' through premium payments and other contingencies.

The balanced approach is through the use of whole life or universal life products with guaranteed interest crediting rates. With universal life or UL the insurance policy is unbundled into the life insurance portion and the investment part, as well as the fee component.

The aggressive approach for life insurance uses variable universal life, sometime referred to as VUL.

Herein, the cash build-up in the policy is variable depending upon the underlying investments selected. With any universal life product, it is critical to monitor the cash balance versus the administration expenses and the policy premium to ensure that the policy is paid and the insurance remains in-force.

As with any policy statement, ongoing monitoring of the assets should be clearly stated. The interval for assessment will be in part dictated by the types of insurance in place and the changes in your overall financial condition over time.

With property and causality insurance, the review period can be every few years. The main focus for P&C is on the deductible level and the maximum coverage versus the premium cost.

There are specific coverage issues as well which should be considered in consultation with your insurance agent. For insurance coverage for your life exposures, the monitoring cycle varies based on the type of life insurance deployed.

For term or guaranteed whole life, every few years is acceptable, similar to your property coverage. When the policies are to be self-funded from dividends or policy loans, the policy coverage should be reviewed annually.

Check that any guaranteed death benefit is satisfied after the premium payment is made. Any variable life insurance should be reviewed annually.

Be it a variable whole life or a variable universal life, monitor the cash balance build-up and compare it to the policy illustrations. Be sure to adjust the illustrations for the actual crediting rates received.

It is important not to be too optimistic in your assumptions. After all, this is about risk management not gambling, even though a probability tool call Monte Carlo simulation is used to test the viability of the outcome for variable life insurance.

The simulation tests thousands of assumptions and scenarios to determine which outcome is most likely and whether it is likely to meet your financial needs in the future as anticipated. When reviewing your long-term financial needs, you need to consider your health. This is true both for gauging the number of years you will need income and for looking at your insurability. Most people think of insurance as an expense and not part of their financial management. It is important to keep insurance in-force as you age.

Term insurance premiums become astronomical for seniors, when they can buy the insurance. Whole life policies can lapse if the premium expenses are not met.

If the policy fails, the financial risks to your family and estate are not mitigated or transferred. They can be catastrophic. Next week, we will examine risk-pooling and the financial leverage gained from the prudent use of insurance products as part of your investment asset allocation decisions.

Patrice Horner holds an MBA in Finance, a Series 7 Licence, and is a Certified Financial Planner (CFP-US). Any opinions expressed in this article are not specific recommendations, nor endorsements of any productions. Individuals should consult with their banker, insurance agent, or financial planner for advice to address their personal situations.