Health life and emergency fund allocation
Health life and emergency fund allocation
The Importance of Having an Emergency Fund
Think of an emergency fund as the financial equivalent of a fire extinguisher you keep in your home. Ideally, you hope you'll never need to use it, but when a crisis strikes, you'll be grateful it's there. An emergency fund serves a similar purpose.
With an emergency fund, you gain financial breathing room. No longer will you need to panic when your car breaks down, you lose your job, or your home requires unexpected repairs. Rather than struggling to find a way to cover these expenses with a credit card or by asking friends for help, your emergency fund is there to handle it. Just deposit money into it and don't touch the balance until a genuine crisis arises.
In an article by Suze Orman on emergency funds, she recommends having at least an 8-month income reserve as an emergency fund. While most people desire an emergency fund, they often talk themselves out of it before they start saving, believing that saving up a substantial amount is impossible or that they can't afford to begin saving immediately. Suze Orman suggests breaking it down into smaller amounts per week, month, or day. You can also establish an automatic savings plan to transfer funds directly from your salary account to your designated emergency fund savings account.
Equally important is an emergency medical fund to bridge the gap between the expenses incurred and the insurance claim payout. The rise in medical costs makes it crucial to create a separate fund for healthcare contingencies.
A new product, Health ULIP (such as Birla Sunlife Saral Life and Health Saver ICICI Prudential), offers a solution. A Health ULIP combines a regular mediclaim policy with a market-linked investment plan. The mediclaim covers hospitalization expenses, while the market-linked plan builds a fund. This money can be withdrawn to cover healthcare expenses or expenses not covered by the mediclaim policy.
For continued health insurance, policyholders must renew it annually, and failing to do so can result in a lapsed policy with lost benefits. This is not a concern with Health ULIPs as, if not renewed, the insurer deducts the mediclaim premium from the fund value, ensuring policy continuity.
Additionally, it's wise to consider critical illness health insurance. While maintaining a healthy lifestyle can prevent many illnesses, certain conditions are hereditary or more likely with age. Unlike minor ailments, the treatment for life-threatening illnesses can incur substantial costs, often in lakhs.
A critical illness policy provides a lump sum benefit, covering the costs of treatment, recovery, and debt repayment. Regardless of your hospital expenses, the insurer pays the entire sum insured. Critical illness policies typically cover 8 to 20 major ailments, including cancer, heart attack, and major organ transplants, offering coverage from Rs1 lakh upwards.
These plans generally require the insured individual to survive for a specified period (typically 30 days) after the critical illness diagnosis to make a claim. Moreover, there's an initial waiting period of 90 days, and any critical illness diagnosed within this period is usually not covered.
In conclusion, emergency savings are invaluable for various situations such as job loss, home and car repairs, natural disasters, or medical bills. Everyone has different financial goals, and it's crucial to have savings accounts that align with those goals. Whether it's an emergency fund, a health savings account, or a critical illness plan, saving as much as possible is essential to ensure you're prepared for the unexpected and prevent unnecessary debt.
Author: Sneha Ramamurthy, Dilzer Consultants Pvt Ltd
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