Most families have a well thought out emergency plan for when disaster strikes, but are you financially protected? Mellody explains how you can build financial protections into your disaster recovery plan.
The number of natural disasters this year got me thinking about what I should do to be prepared. What are some of the things I need to do financially? – Billy, Knoxville TN
Billy is asking a timely question as we observe the 10-year anniversary of 9/11 and move forward after Hurricane Irene, Tropical Storm Lee and the wildfires in Texas. Disasters, whether natural or man-made, usually strike quickly and without warning. That’s why it’s important to plan for the possibility of disaster and not wait until it happens. The best thing you can do to make sure you are financially prepared is to incorporate financial protection measures into your disaster recovery plan. While a disaster recovery plan will include things like evacuation routes, meeting points, methods of communication and backup supplies of food and water, you should also make sure your plan addresses basic financial protection like property insurance, income protection and safeguarding documents and important account numbers.
Let’s start with property insurance — don’t most homeowners already have this?
Yes, most homeowners have property insurance because if you have a mortgage, the bank will require it. However, you may not have all the protection you need because homeowners insurance is designed with the average American household in mind. Your policy may not cover possible damage from natural disasters that are more likely to occur where you live. The first thing you should do is review the exclusions statement of your policy. The typical policy does not provide much more than protection against fire and maybe damage from falling objects and wind. If you have a mortgage and you live in a high-risk flood area, your policy probably covers flood damage because your mortgage lender requires it. But studies have shown that as many as 25% of flood losses occur in areas that are considered low-risk, so even if it’s not required by your mortgage lender, you may want to purchase additional coverage. You can purchase flood insurance for as little as $129 a year for a low to moderate risk area, so it can be well worth the money when you think about how costly it is to repair damage from a flood. For more information on flood insurance, visit the National Flood Insurance Program website at floodsmart.gov. Similar to flood insurance, earthquake coverage is not included in most policies so if you live in a high risk area, ask your insurance agent about purchasing a separate policy for this. As far as hurricanes, tornadoes and windstorms, your policy probably covers these hazards, but if in doubt, talk to your insurance agent. Additional tips include:
- Buy replacement cost coverage. This means the insurance company will pay to replace your house up to the policy limits. In some states, full replacement cost coverage is not available so check with your insurance agent to figure out the maximum available coverage.
- Have your home re-appraised from time to time to make sure your policy reflects its current replacement costs. Also, update your policy to include any home improvements.
- Don’t try to save money on premiums by underinsuring your home — increase your deductible instead.
- Check if your policy covers living expenses if you have to move out of your house temporarily.
If I can’t get to work because of a disaster, will I still get paid?
If you live near your employer, there’s a good chance your workplace will be affected by the same disaster. Know your employer’s disaster recovery plan including alternative business locations you can use on a temporary basis, whether you can use vacation or sick time to take care of matters after a disaster and whether you will be paid if your employer has to temporarily shut down. If you don’t get paid, consider using your emergency fund. If you don’t already have one, start saving so that you have 3-6 months of living expenses stashed away, and consider keeping your emergency fund with a bank outside your local area to decrease the chances it is affected by the same disaster.
You should also review your disability benefits in case you are injured or become disabled because of a disaster. If your employer does not offer disability insurance, you should purchase an individual disability policy. The cost will depend on your gender, age and occupation, but expect to pay between 1% - 3% of your annual gross income for a good disability policy.
Where should I store my financial records and documents? Is it safe to keep them at home?
It’s definitely a best practice to keep a copy of your records outside of your home in a safe place like in a bank safe deposit box or with a close relative who doesn’t live in your area. Critical documents include birth certificates, marriage license, passports, military records, divorce and child custody documents, social security cards, mortgage/property deeds, stock and bond certificates, car titles and a list of all of your insurance policies. If you’re storing these documents in a safe deposit box, consider using a bank outside the immediate area of your home. If you decide to store your documents at home, make sure you use a home safe that can withstand temperatures of up to 1,700 degrees. Keep the safe locked at all times and tell someone you trust where you keep the key or combination. Also, inside your disaster supply kit, include contact information and account numbers for your mortgage, loans, credit card and other key accounts. You may need to contact them in a post-disaster situation to let them know if your payments will be late or if your credit card needs to be re-issued.