Learn and Plan | How to Plan for Financial Emergency
financial professional and client review financial emergency plan

How to plan for a financial emergency

Jun 13, 2023, 3:22:21 PM | Reading Time: 5 Minutes

Unexpected events can have a dramatic and lasting effect on your financial future if you aren’t prepared. With a bit of planning and saving in the present, you’ll be able to handle emergencies if and when they happen down the road. Here are 5 tips that can help keep your life going when disaster strikes. 

Build an emergency fund

The most important action you can take to prepare for the unexpected is to build an emergency fund. This buffer account should contain enough cash to cover at least three to six months of expenses. The more dollars you can put in the fund, the more breathing room you’ll have if an emergency occurs, like a job loss or serious illness. If you have a family, consider building an emergency fund that can cover a year to provide a good cushion for your family. 

Obtain life insurance

You may want to have a quality life insurance policy that will provide for your family should something happen to you. The value of your policy benefit should provide enough money for your beneficiary to cover your funeral costs, pay off any debts you have, and cover the cost of living for your dependents after you’re gone. You may also consider the cost of your kids’ education as well. 

Consider additional insurance

Having insurance won’t provide for all your expenses if an unexpected event occurs, but it will make a big difference. If you fall seriously ill, medical bills can quickly add up. You should have health insurance coverage to soften the blow. If you’re injured and can’t work, you’ll be saddled with medical bills AND you won’t be able to make money. Make sure to research the best options for health, life, auto, homeowners, or renter’s insurance to protect your finances. Depending on where you live, you may also need to plan for natural disasters like hurricanes, floods, forest fires, tornadoes, and earthquakes. Talk to your insurance provider about getting disaster coverage if you’re in a high-risk area.

Make a backup budget

Along with working an emergency fund into your finances, you should also make sure to maintain and reassess your budget often. Ensuring that your budget is in good shape and efficient is not only a great habit, but it will also help you prioritize and adjust items more easily to cover any unexpected costs. You may also consider creating a backup budget that streamlines your expenses in an emergency situation. Look over your current budget and figure out what you can cut if necessary. Planning an emergency budget now will make it much easier to deal with a crisis if it comes.

The primary purpose of life insurance is to provide a death benefit to beneficiaries. Because of the uncertainty surrounding all funding options except savings, it is critical to make personal savings the cornerstone of your college funding program. However, even a well-conceived savings plan can be vulnerable. Should you die prematurely, your savings plan could come to an abrupt end. To protect against this unexpected event, life insurance may be the only vehicle that can help assure the completion of a funding plan. In addition to the financial protection aspect of insurance, the tax-deferred buildup of cash values can be part of your college savings plan. Generally, if the policy is not a Modified Endowment Contract then tax-free withdrawals can be made up to the contract's cost basis. Moreover, if the policy is not a Modified Endowment Contract, then loans in excess of the cost basis are also tax-free as long as the policy remains in force.

The death benefit will be reduced by the amount of the death benefit accelerated. Since benefits are paid prior to death, a discount will be applied to the death benefit accelerated. As a result, the actual amount received will be less than the amount of the death benefit accelerated. An administrative fee is required at time of election.