We always think about physical safety and forget about mental safety. Even financial safety for life, to be precise. When we face an unexpected situation that needs financial aid, what do you do? We all dig into our savings, mortgage gold or some other assets, borrow from friends and family, and even sell things we own. What if there are financial products available in the market that can avoid doing these things when you need a financial aid due to unprecedented incidents?
They come under three essential categories,
- Emergency Fund
- Term Life Insurance
- Medical Insurance
Thanks to Monika Halan for teaching some of these things to me through her book, Let’s Talk Money.
These financial categories considered safety net for us and our families. People from all age groups who are financially stable and experts in the financial industry recommends to build this safety net for everyone and should be in a checklist before investing money anywhere.
Imagine getting into an emergency such as losing your job, facing a terminal illness and losing the earning family member. How will you manage it now? This would give you a quick insight into your future if any of the unprecedented situation hits you.
Most of the people get into huge debt, when they are not prepared for these emergencies. You don’t want debt following you throughout your life.
Post this exercise, I hope you are convinced that you need to build a safety net for you sooner in life. If you can afford, do it now. Otherwise, start gradually.
Let’s see how each of the safety net can be built.
Emergency Fund
Emergency Fund is a financial plan that can save during a financial crisis such as job loss or business loss, and losing earning member of the family. This is not a financial product category, but rather a practice of saving money that can give a runway when required.
How much money will help you during a crisis like a job loss? Often, six months of your income would be a great amount. But, the coronavirus pandemic forced people to expand this to even a year of income. Calculate your family’s income and expenses and add a buffer for unexpected emergencies during this period to conclude on what you would require. There are calculators available for it online.
This money would be required immediately when the situation arises, so, it has to be saved in a high liquidity product. For example, bank fixed deposit and liquid mutual funds are a great fit. Don’t seek for a good return on this money. Retaining the complete money all the time for any emergency is the goal here.
Do your research and build a rainy day fund sooner. I will write a separate article on how to build this gradually.
Medical Insurance
Medical Insurance is a financial product category. It can cover any medical expenses so you don’t have to break your emergency fund for a medical expenses and it can sometime become huge that cannot be paid by one without getting into huge debt.
Of course, our emergency fund could provide for your medical expenses. But, why do you have to use it for a planned medical expenses? And it could not cover for big medical bills. Medical insurance can cover the whole family with a minimal annual premium instead of the actual medical bill amounts. So, purchase a family floater medical insurance.
All the registered employers provide for medical cover for their employees and their dependents. Don’t settle for the medical cover that your employer provide. Purchase an additional medical cover on your own as you will lose access to the medical insurance when you no longer work there and you don’t want to buy a medical insurance in rush when you just lost a job. Also, you don’t want this to be a factor in your professional decisions.
Medical insurance has a lot of options and conditions. Go for what is suitable and it all would affect the premium. If you have a right medical insurance, you will get out of any medical emergency with your savings untampered.
Medical insurance can be a topic on its own. So, I will stop here. You can explore about it and buy the most beneficial and suitable medical insurance for you.
Term Life Insurance
Term life insurance is a great financial product. It can cover the life of the earning member of the family so they can provide for their family in the long term even after their demise.
Any life insurance cannot be a replacement for this. Pure term insurance is a separate category. Often, it’s not sold by the insurance agents who would approach us. Even when I asked about it, an insurance agent tried to sell me a money back insurance product. This is because annual premium would be way less in pure term insurance policies and most of first year’s premium is given to the insurance agent as commission.
Term insurance costs lesser compared to the traditional insurance products such as endowment, money back, and ULIP. Because, there’s no maturity benefit if the insurer survives. But, Term Insurance provides the greatest cover of all and this would be of helpful when an earning member of the family dies.
Do not expect a return on this as getting a life cover for your depends is the goal here. If any other benefit is attaches, often they are to divert you to pay more premium. To get a return, you can invest the rest of the premium you would have otherwise paid on traditional insurances to proper investments where you can get greater returns.
Term Insurance comes with riders (add-ons) for the other benefits such critical illness benefit, terminal illness benefit, and so on. Check them all and opt for them if you can afford. Purchase a term insurance based on how much cover would you require, how much premium that you can afford, how’s the claim experience and claim success the insurance provider has, and what are the riders (add-ons) would you prefer.
Final checklist
You are good if you have these in your bucket.
- Emergency Fund of 6 months of your income in an immediate redeemable account.
- Medical Insurance with family floater plan with Super Top Up and any existing illness covered.
- Pure Term Insurance with cover for 10 to 20 times of your annual income with suitable riders.
Have a great life for you and your family!