Savings not a substitute for insurance

Your discussion last week on emergency savings and pay advance was appropriate and timely. So far I have managed to build my own emergency savings fund equivalent to six times my monthly salary, as recommended in sound financial planning. With an emergency fund in place, do I really need to have an insurance cover? Explain to me the importance of having the two?

Vincent,

Mombasa.

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Vincent, the role of emergency fund and insurance coverage is something that has been confusing many people who think one is a substitute for the other.

As a result, many policyholders have unwisely cancelled their insurance covers upon building their emergency funds whilst others have failed to set up emergency savings in the comfort that they have an insurance cover.

But this has plunged many people into financial distress during emergencies or uncertainties.

Insurance cover and emergency savings are not substitutes for each other, but are separate plans that should complement and reinforce each other in financial planning.

Although the two complement each other, their roles are different .

An emergency savings fund is to help you cope with emergencies requiring ready money.

These emergencies may come in the form of a job loss, a significant medical expenses resulting from injuries and even home repairs.

Whenever an emergency strikes, you will be compelled to seek additional source of money to meet you expenditure before you can regain your financial muscle

For instance, in the case of a job loss, you will need to meet your monthly expenditures even though you will not be getting any income in form of a salary.

But an emergency fund can help you to meet your financial obligations as you look for another job .

An emergency fund is a financial buffer that safeguards you from plunging into debts or financial difficulty upon any sudden and temporary financial loss or deficit.