Are you done with Financial Contingency Planning?

Dictionary meaning of contingency is ‘a future event or circumstance which is possible but cannot be predicted with certainty.’ A financial contingency is the same where future events, problems or emergencies will be possible but can not be predicted when it will occur. It may occur tomorrow itself or in 6 months time or in 2 years time.

Let us see what could be the various contingencies that might come in our lives. The family’s financial strategy needs to provide for these risks. The following are typical contingencies to provide for.:

A. X family is clearly dependent on both incomes. If anything were to happen to either earning member, the family will be dire straits. Life insurance that too, sufficient TERM insurance plan will mitigate this risk. Some important point to be remembered

Never mix Investment and Insurance. This is thumb rule of Financial Planning.

Never buy Endowment , whole life and Money back policies or even ULIPs. Just plain vanilla Term plan is sufficient for the insurance need.

But if Investor wrongly stuck up with traditional insurance plan then he/she remains underinsured if they can’t afford to pay huge premiums for the required Sum assured and secondly on the premium, so-called invested amount, fetches 4/5 % returns only. So it is always better to keep investment and insurance separate.

B. Healthcare costs are another financial risk for the family. Having adequate standalone Medical Insurance policy for self and dependendets apart from employer health coverage can mitigate this risk. Some important point to be remembered

Medical emergencies come unannounced. To get the best medical facilities without a financial burden you will need health insurance.

Health cost is increasing at an alarming rate worldwide. Medical inflation is highest in India. New diseases are emerging and their treatment cost is increasing. Health cost can make a big hole in the individual’s pocket if a prior provision is not made in advance.

Many times the company’s group health insurance sum assured is not sufficient as well as If you lose your job, your group health cover is ceased. You will not be a part of that.

So apart from employer‘s health plan, extra health insurance can serve you as a cushion in above-mentioned situations. One can buy a standalone health policy or family floater as a base plan added to the company’s health coverage. The additional super top-up plan can be purchased at a very reasonable rate.

C . Income streams are also affected if people lose their jobs. The double income, in this case, offers some kind of insurance against the job loss risk. If one loses the job hopefully other retains the job. This would ensure that some income is coming in every much. This risk can be mitigated by having adequate Emergency Fund.

An emergency fund needs to be the first goal towards which a household should save as a protection against the possibility of loss or reduction of income.

The fund should be adequate to meet the expenses for six months for a salaried person and 1 year for the self-employed person in the event if the regular income stops.

This fund should be liquid enough to access easily when needed. If it is used then efforts must be made to replenish it as soon as possible.

The adequacy of the emergency fund should also be periodically reviewed. It should be done annually or whenever there is a large addition such as an EMI, to the monthly expenses.

D.Separation (divorce) is another risk the families face. To mitigate this risk healthy distribution of assets between spouses are important.

For example, in some investments, one partner will be the first holder, while the other may be a joint holder, the holding pattern can be reserved in some other investments.

In case of double income families, the holding pattern can be closely aligned to the sources of income of the investment.

Another approach would be to keep the salary account of each partner distinct. This account to be used only for investment and one more for household expenses and both the partners to fund these accounts. This helps in better expense monitoring, investment record keeping and tax record keeping too.

This way you can mitigate the Financial contingency risks of life which are unpredictable but manageable if happened, unfortunately.

Investment process should started only after you are done with CONTINGENCY PLANNING.