Life Insurance vs. Emergency Fund: Why You Need Both

Life insurance and emergency funds are both important tools to protect your family and your finances. Here’s what to know about them and how they complement each other.

For professional guidance on both life insurance and broader financial planning, Farm Bureau can help. Talk to an agent and get your questions answered. 

Why You Need Life Insurance

Life insurance gives your family financial protection in the event of your death. It can replace your income, covering the costs of everyday needs like childcare and groceries as well as helping your family continue to save for future goals like college. 

Even young and single people should look into life insurance.  It can help cover funeral costs and any debts that co-signers (such as your parents) would be responsible for, ensuring they don’t inherit a financial burden. Plus, when you buy life insurance when you’re young and healthy, your premiums are lower – and they stay low for as long as you own the policy. 

Beyond protection in the case of your death, there are strategies for how to use life insurance when you’re alive. For example, you can use permanent life insurance to build wealth, as policies can include a cash value component that grows over time. You may be able to withdraw this money, take a loan out against the cash value or use the cash value to pay your premiums.

Why You Need an Emergency Fund

An emergency fund is an account holding money you’ve set aside for unexpected expenses, like car repairs, medical bills or living expenses if you lose your job. These funds shouldn’t be used for other savings goals, such as holiday gifts or a vacation; a true emergency is unexpected and could be financially damaging if you’re not prepared. Since you never know when an emergency might happen, the money in your emergency fund should be easy to access. Savings accounts are popular places to hold emergency funds.

The amount of money you need in your emergency fund depends on your income and expenses. Many experts recommend an amount that could cover three to six months of your costs. 

If you need to tap into your emergency fund, be sure to start rebuilding it as soon as you can.

How Life Insurance and Emergency Funds Work Together

Life insurance and emergency funds both help you cover unexpected expenses but in different ways. Emergency funds are important because they cover things that can crop up in everyday life. You can quickly and easily withdraw the money you need from an emergency fund. Building and maintaining an emergency fund is a critical financial priority; though you don’t know when unexpected costs will pop up, you can be sure that they will at some point. 

The main purpose of life insurance is to help your loved ones cover expenses after you pass away. Even if you’ve built cash value, you generally can’t get money out of a life insurance policy as quickly or easily as you can from a savings account holding your emergency fund. It’s not meant to be liquid assets to help when an expense arises; the purpose is to protect your family if the worst should happen. Because life insurance is likely more affordable than you expect (it can be as little as a dollar a day¹), in all likelihood it’s possible to protect your financial future with both an emergency fund and life insurance coverage.

Strike the Right Balance With Help From a Pro

It can be hard to figure out how much money you should have in an emergency fund, how much life insurance you need and how to balance the two. Reach out to Farm Bureau for a consultation. We can help you come up with a plan to cover emergencies, whenever they occur.