Fortification of your finances:
What does fortification of your finances really mean?
The term fortification essentially means creating a defence or reinforcement that gives you strength against any attack or in other words – risk. True financial fortification would mean that your defence or support has to be very strong and all protective against any kind of risk of financial loss or expense. Essentially it would mean that you and your family is financially ready to deal with any unpleasant, unexpected developments.
Typically any person or family always is faced with some financial risks which may follow any unpleasant event like death of earning member or hospitalisation or accident or illness of any person. There are also many other type of financial risks, but we will ignore them for this article. Without adequate protection against death, disease, disability, etc., the long term financial goals of a family like education for children, purchase of home, marriage plans, etc. too are put on high risk.
Life insurance, health insurance, critical illness insurance and accidental insurance are tailor made products that help you in fortification of your finances. They protect by minimising the cash demands on your existing savings or wealth earmarked for your financial goals. By providing you with additional capital, the insurance plans should take care of your financial needs at such times. However, it has to be noted that the insurance protection cover has to be adequate to ensure that you remain in safe waters.
Here are some of our thoughts on your fortification of finances.
Emergency fund: The emergency fund is your first source of support should any unexpected development take place. There is no product for emergency fund however, it is very important that such money be kept in liquid assets. Mutual fund liquid schemes can be good avenues for keeping your emergency fund. The fund should be kept secured and whenever any withdrawals are done, it should be replenished back. Typically at least three to six months of your total household expenses should be kept in emergency funds. How much to save will depend on case to case basis and typically those with volatile income streams should have higher targets.
Life Insurance: While many of us have life insurance, typically the underlying product is a traditional insurance plan sold by your friendly insurance agent. Unfortunately, such plans normally have very low insurance cover which will prove to be inadequate for your family for sustain themselves for the future. So how much should be the cover for?
The life insurance cover should be able to
(a) repay all your existing liabilities,
(b) provide for all pending financial goals like education, marriage, etc., and
(c) provide for regular household expenses (inflation adjusted) for foreseeable future.
You may realise that your existing life cover will be very inadequate to meet all the above. Traditional plans will come at a very high cost for such cover and will be unaffordable. The only product that can meet your need is the – pure term insurance product which provides at the highest cover at the lowest cost. However, there is also an upper limit on same. We would recommend that you should sit with your financial advisor to really understand the cover you should take. Typically for a middle class family with four/five dependents should have term insurance of at least Rs. 1 to 2 crore.
Health Insurance: Health insurance is indispensable today and a must for everyone. There are many products available in the market that will help you smartly plan for health expenses of you and your family. Products like floater policies, top up and super top up products are popular and a good mix of right products will truly help you manage your financial risks in this regards.
The question here too is how much cover will be adequate? With fast rising medical health costs, the health cover amount should be regularly assessed. Typically a family should have at least 5 to 10 lakhs of family cover depending on your financial status and city. Buying a health insurance at early age when everyone is healthy is highly recommended as you may find it difficult to get a policy in future post any medical condition arises.
Accident Insurance: The accident insurance is another basic product highly recommended. It is more of an advanced product and protect you against hospitalisation, treatment expenses for certain kind of accidents. It will also protect you against temporary or permanent – partial or full disability unlike any other product. It will also provide you with protection against temporary loss of income post accident. Being an inexpensive product, it is highly recommended. The cover amount should be at least upwards of Rs. 50 lakh and if possible should be even higher than term insurance as family expenses will be very high post any disability /accident. However, getting a higher cover is not easy and will depend a lot on your income and nature of job.
Critical Illness Insurance: The critical illness is a bit more advanced product which you should explore. It would provide you with financial support when any critical medical condition develops. The need for critical illness is subject and if you have a family history or likelihood that a critical medical condition may develop in future then it is more recommended. Also, it can be seen as an extra layer of protection which you may opt for to further fortify your finances if you can afford it along with the basic insurance products. A critical illness cover of about 20-25 lakhs would be adequate for most people.