One of the universal truths is that life will never be free of uncertainties. Therefore, one must be prudent enough to make contingency plans to keep themselves afloat during turbulent times. An emergency fund is an important aspect of these contingency plans. The emergency fund investment options range from a generic savings account to ULIP insurance.

Let’s learn about the benefits and the importance of having an emergency fund.

What does an emergency fund mean?

An amount of money that an individual sets aside for use during an emergency is known as an emergency fund. In simple words, an emergency fund is the foundation of a strong personal finance plan.

It is advised that an emergency fund should be enough to cover one’s essential expenses at least for six months. The fund amount will be different for different individuals. If one has just started earning, they should build an emergency fund covering at least three months of their living cost. However, they should eventually increase the amount in the fund.

One of the most important functions of the fund is to protect your main savings account, investments, and retirement corpus. An emergency fund is a large financial safety net for the individual.

 

Why should one keep an emergency fund?

 

• An emergency fund in India is mostly created to cover unforeseen medical costs and treatment. However, the purpose of such a fund is not limited to only medical emergencies.

• An emergency fund can pay the essential bills when one is unemployed or receives irregular remuneration.

• An emergency fund also ensures that the individual does not have to take drastic measures such as selling off their valuables to gather funds during a crisis.

• The emergency fund can also be used to fund urgent and last-minute travels in case you visit family members when needed.

• One can also pay off pending debts with the help of an emergency fund.

 

What are the benefits of having an emergency fund?

• Extra earnings
  
  While the emergency fund should be kept safe and not used for every little need, these funds should be sufficiently liquid for easier accessibility. There are different ways to invest in an emergency fund.
  
  In ULIP insurance, you can safely invest in market-linked instruments of your preference and earn good returns on them, which helps you build a robust fund during the investment period. These ULIP plans not only provide the individual with life insurance and investment benefits but also provide certain tax* benefits.
  
  After the lock-in period, these ULIP insurance funds can be easily withdrawn during times of need.

 

• Peace of mind
  
  Having an emergency fund greatly reduces financial stress. A strong financial plan with all the necessary emergency provisions enables a person to be better prepared for unforeseen events.
  
  An emergency fund also helps one in maintaining their standard of living after retirement as it can provide a stable income in the absence of a regular salary.

 

• Securing the future
  
  Securing one’s health and the well-being of their loved ones is one of the most important benefits of having an emergency fund. In case of an unfortunate event, the fund should be enough to look after one’s family for at least a few years, if not more.
  
  However, one should remember that having such a fund does not negate the need for a proper life insurance plan to protect your loved ones.
  
  

• Debt management
  
  Most people tend to rack up their credits and debts during a medical emergency or even to manage other expenses. Hence, with a good emergency plan, one can avoid unnecessary piling of debt, pay off pending loans and reduce their financial burden.
  
  

• Prevents impulsive spending
  
  Since building an emergency corpus requires a disciplined approach to savings and ensures that money is secured in a scheme or plan, it prevents individuals from impulsive spending. It helps one develop a saving and investing habit over a period of time. The funds can then be used to take care of one’s own and their family’s financial goals.
  

How to start an emergency fund?

Starting an emergency fund does not require one to invest their entire paycheck into their emergency fund. By opting for a ULIP plan, you can start an early investment that will not only help you build an emergency fund for the future but also protect you and your family with a life insurance cover. To ensure that you can make the most out of your ULIP insurance, you can also switch between funds and opt only for funds that help generate better returns.

Some people have enough in their emergency fund to cover the next two years of their lives. One can adjust the amount, and the period it covers according to their lifestyles.

ULIP schemes are a good choice when considering emergency fund investment options. However, it is important to find the plan that aligns with their risk appetite and investing style.

 

Tata AIA Unit Linked Insurance Plans

Tata AIA Life Insurance offers a range of Wealth Solutions (ULIPs) to suit varied needs.

The plans help individuals create an emergency fund and ensure the protection of their loved ones. The ULIP premium amount is invested in the market by experts to provide decent returns on your emergency corpus while the other half of the premium provides a protective insurance cover to you and your family. One can make the Tata AIA Life online payment process to purchase or renew the ULIPs seamlessly online.

The ULIP plans also offer tax* benefits for the premiums paid under Section 80C of the Income Tax Act. However, you will have to pay a long term capital gain tax on the profits you make from the markets. 

 

Summing Up

One should remember to factor in inflation while creating an emergency fund. A corpus will also help the individual move closer to their retirement goals. The fund can be increased or decreased as per the needs of the individual. If the emergency funds are invested wisely, then the benefits are virtually limitless.

L&C/Advt/2021/Jul/1158