In financial planning, term life insurance and emergency funds are two elements that are of equal importance in maintaining financial stability. More often than not, these two are either interchanged or viewed as the same. In truth, although they have similarities, they are designed for different purposes.

In this article including the relationship between the two both will be discussed. By reading this, your misconceptions will be straightened out. Regarding this matter you will find here answers to the frequently asked questions in addition.

What are term life insurance and emergency funds? For just a term or a specific period of time as its name suggests term life insurance is a kind of life insurance that takes effect. During the duration if you die from any cause your insurer will pay your family. If you will fail to renew it after it lapses the coverage will cease. A budget allocation for unwanted yet possible circumstances that come in unannounced is an emergency fund on the other hand. You do not spend it unless an emergency takes place as it is strongly recommended. Stored foods that must only be eaten during rainy days.

How important are they? Both are of great importance. In financial planning they are the building blocks. Where you can turn to no one when a crisis blows up nobody wants to be in a situation. If the bread winner of your family suddenly dies or when a member gets hospitalized borrowing money from private lenders would be the last thing that you would like to end up doing.  If they cannot afford a permanent life insurance small investors should have these two all the time. Every time it would expire so you are always covered  it will be beneficial if you would renew it.

What are the differences between the two? These two are intended for different purposes. The emergency fund is for urgent situations that do not necessarily involve death of the person who built it. Rather, it is projected for unexpected pregnancy, sudden unemployment, getting affected by the occurrence of natural disasters and other related incidents. Meanwhile, the term life insurance is for the compensation of your beneficiaries should the insured meets an untimely demise. The first can be withdrawn right away as it is usually stored into a bank account whereas the proceeds in the other can only be withdrawn upon the death of the insured individual or when the duration comes to an end.

Why are they associated to each other? As an emergency they are often linked with each other most of the time as an early death of a person can be deemed. In the case of the demise of the bread earner of the family this is true. The flow of income of the household will cease leading to more financial problems upon the incident. In your emergency fund that you can withdraw at the time when a crisis arises the lump sum that the beneficiaries will receive from the insurer is likened to the money. To some extent both offers security on urgent situations and their nature is the same.

Is it possible to arrange your emergency fund using your term life insurance? In a way you can do that. While the agreement is ongoing  you cannot withdraw the money that you are paying to the insurance firm as the terms and conditions would still apply of course. Upon your death  your beneficiary will receive money only since the contract is binding. If you will treat such incident an urgent situation, then your term life insurance can function as an emergency fund in a way however. this perspective, the “fund” might be bigger than you could have saved. Though that this will always be the scenario you cannot expect.  Should the latter be treated as a security blanket?

As one you should not treat the two ideally. You will save up for an emergency fund as well as it will be best if aside from availing of a term life insurance. From insurance companies there are reported cases of insured individuals who fake deaths so that their beneficiaries can claim a lump sum. Because they have not saved up for emergencies which sprang up it is very possible that they have resorted to such act.  To be always prepared so you can conquer everything that life will throw at you it pays.

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