Personal Finance: Financial planning for an emergency
Job loss, death, sustained loss of health: If there is one thing that the pandemic shown, it is that we cannot assume that we are immune to emergencies. But what are the lessons that we can learn from that? A lot of people deal with emergencies by relying on credit cards. Others take out loans and fail to save or make investments in the bargain. Here’s how you can avoid a crisis.
Have a contingency fund
Though companies are bound under the Payment of Gratuity Act, 1972 to pay their employees severance equal to three months salary in case of a sudden job loss, many employers do not do so citing company losses. So, lesson one. Create a contingency fund that will help you survive for at least four months. Raj Khosla, founder and managing director of financial services marketplace MyMoneyMantra said, “For funds earmarked for emergency use, ease of access to the money is paramount. You need to ensure maximum liquidity with minimal hassles, so park the money in savings accounts, liquid debt funds, or small saving schemes with fixed returns and easy exit options.” In case you have received severance pay, add it to your contingency fund.
Buy health insurance
Sudden ill health means that your money will necessarily get diverted to pay medical expenses. Lesson two: Buy health insurance and pay the premiums regularly. Pankaj Verma, head-Underwriting, SBI General Insurance said, “A comprehensive health plan protects savings by covering pre-hospitalisation, hospitalisation and post-hospitalisation expenses in case of unforeseen emergencies.” Verma also advised salaried people to add the sum insured amount for medical emergencies with a top-up health insurance plan. An indemnity base policy, for instance, reimburses the policyholder the amount spent on medical treatment, paying back the amount spent on hospital stay and subsequent treatment up to the sum insured under the policy. “This can help in case of job loss and can keep your coverage uninterrupted between the job transitions,” Verma said.
Insure your life
Be it life or health cover, we need insurance so that our families are secure, especially at times when we are not in a position to take care of them ourselves. It is essential that you do not conflate insurance with tax savings or investments. “As such, any earning person with dependents should have a total individual term plan up to 10-20 times of the annual income considering the assets and liabilities in hand,” Adhil Shetty, CEO, BankBazaar, an online market place for financial products said. To decide how your cover, evaluate your financial assets and liabilities. For example, if you have a salary of Rs6 lakh per annum, then the ideal cover must be 20 times that, which is Rs1.2 crore. However, let’s say you have a loan of Rs50 lakh, then you should buy a cover of Rs1.7 crore. This will ensure that your family has enough money in hand for their entire lives even after having paid off your loans/liabilities.
Not many know of the government-sponsored pension scheme which allows you to contribute regularly to a pension account during your working life. Upon retirement, you can withdraw up to 60% of the corpus in a lump sum while the remaining amount could be used to buy an annuity or regular pension post-retirement. There are seven different annuity service providers under the NPS scheme. Depending on the terms and conditions of the annuity service provider, the nominee’s account will either be credited with the pension amount or reimbursed the remaining 40% of the maturity amount. CS Sudheer, founder of IndianMoney.com, an online financial advisor site explained why NPS is a good idea. “In case of the sudden death before attaining the age of 60 years, the entire amount is paid to the nominee or legal heir of the subscriber.”
That’s exactly the sort of relief you’d require if you ever face an emergency.
Tying up loose ends
And finally, the most important lesson: Most financial planning goes awry owing to our callousness in not choosing our nominees wisely. Write their details clearly to prevent confusion during the handover of the maturity amount to the nominee. If the nominee is a minor, take care to secure a guardian to whom the funds can be entrusted in the event of sudden death.