How to prepare your finances for a natural disaster

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Having your finances, insurance and important papers in order before a natural disaster strikes can ease the stress of dealing with the damage and disruption caused by a hurricane, earthquake or other catastrophic event. But many Americans do not prepare.

According to a survey by The Weather Company, 40 percent of Americans have no plans on how to handle an emergency and only 16 percent have a preparedness kit ready in case of a severe weather event.

In addition to the lack of physical preparedness, there is a lack of financial readiness for emergencies. A recent Bankrate survey found that only four in 10 adults would cover the cost of an unplanned $1,000 expense using their savings. The rest would use a credit card, borrow from family or friends, take out a loan or forgo paying something else to come up with the money.

“The expression, ‘The time to repair the roof is when the sun is shining’ speaks to the importance of developing a financial plan to deal with natural disasters before they take place rather than after the fact,” says Kurt J. Rossi, CEO of Independent Wealth Management in Wall, New Jersey.

The COVID-19 pandemic, which has hammered the U.S. economy and forced more than 30 million Americans to apply for unemployment benefits, is a grim reminder that disaster can come in many forms and hit anywhere. Regardless of where you live, here are steps you can take to prepare your finances for a natural disaster.

Build an emergency fund

A good strategy is to try to save $1,000 as soon as you can. Then, build up your savings to at least three to six months’ worth of your current expenses. A savings account with a high APY and low minimum balance requirements, such as those offered by American Express Bank or Varo Money, can help you reach these goals. Designate the account specifically for emergencies and sign up for automatic deposits.

You can also build up your emergency fund in a money market account. Like a savings account, a MMA is a safe place to park money and earn some interest.

Also consider creating a smaller cash fund in case power is cut off and bank services are not available. Create a cash fund to cover expenses for up to three days. Consider the fact that you could be without access to your bank account or even a paycheck for a while after a disaster.

Budget for repairs to strengthen your home

Do you live in an older home or one that’s not built or equipped to withstand natural disasters? You may need to make repairs and/or updates to better protect your home.

If you’re not sure about your home’s condition, consider getting both a home inspection and a roof inspection to identify vulnerabilities. Focus on making safety-related repairs and upgrades. Postpone aesthetic or superficial changes until you have the cash.

Review your insurance policies

Storms, fires, droughts and other natural disasters in the United States resulted in insured losses of $24.4 billion in 2019, per data from Property Claim Services.

According to the Insurance Information Institute, the largest property loss events of 2019 included: flooding across the Mississippi, Arkansas and Missouri River basins ($20 billion), Tropical Storm Imelda ($5 billion), California and Alaska wildfires($4.5 billion) and Hurricane Dorian ($1.6 billion in U.S. East Coast losses).

Check your insurance policies to make sure there aren’t gaps in disaster coverage. Most homeowner policies cover fire damage, for example, but don’t cover damage caused by floods or earthquakes.

“As you acquire assets and build your net worth over time, it is important to protect these assets,” Rossi says. “Property and casualty insurance is a critical part of proper planning. From reviewing home and auto insurance coverage to umbrella insurance and business coverage, understanding the extent of your insurance and their limitations is important before the unexpected occurs.”

Here are some key natural disaster and insurance facts you may want to consider before buying insurance:

Flood

  • Most homeowner insurance policies don’t cover flood insurance. You have to buy a separate policy.
  • You may be required to get flood insurance if you’re in a flood-prone area.
  • Forty one million Americans live in a 100-year flood zone, according to a 2018 report released by University of Bristol, U.K., and the Nature Conservancy. A 100-year flood is a flood event that has 1 chance in 100 (or 1 percent) of being equaled or exceeded in a given year.
  • You don’t have to live in a high-risk flood zone to be struck by disaster. About 25 percent of all flood insurance claims come from areas with low to moderate risk, according to the Federal Emergency Management Agency.
  • The National Flood Insurance Program (NFIP) generally has a 30-day waiting period for flood insurance to take effect to prevent people from buying it at the last minute, when flood danger is imminent. Buy coverage well before hurricane season begins.

Earthquake

  • Earthquake insurance isn’t normally included in homeowner policies and isn’t required by law.
  • You’ll need to add a policy endorsement or separate policy if you decide you need earthquake insurance.
  • Consider getting earthquake insurance if you live in an area prone to seismic activity.
  • Earthquake insurance covers any damage from an earthquake (except fire).

Wind

  • Homeowners insurance typically covers wind damage, but there are some exceptions.
  • Some states have homeowners insurance policies that won’t pay for windstorm damage. If your policy doesn’t cover windstorm damage, it likely won’t cover damage from a tornado or hurricane.
  • If you live in one of those states and want coverage, buy a separate windstorm insurance policy.

Wildfire

  • Damage from wildfire or fire is usually covered in a homeowners policy. However, coverage may vary by location.
  • You might find that some insurers do not sell homeowners policies in areas where wildfires are common.
  • Dwelling, personal property, additional living expenses and landscaping coverage are typically covered by your homeowners insurance policy. Check your individual policy for details.

Hurricane

  • Most homeowners in hurricane-prone areas are required to have hurricane insurance.
  • Homeowners insurance policies in some hurricane-prone states will partially or completely exclude wind and flood-related damages.
  • You may find that if your policy does cover wind damage, it might include a separate hurricane deductible that is higher than your regular deductible.

Independent Wealth Management’s Rossi says it’s common for policyholders to cut corners and opt for cheaper insurance that leaves them with gaps in coverage. Consider speaking to a specialist in this area to review your coverage. “Be sure to make an accurate apple-to-apple comparison of coverage, deductibles and exclusions before changing providers,” he says. “Remember, cash reserves alone will most likely be unable to cover sizable losses that can be realized in a natural disaster.”

Create an emergency document kit

Figure out what paperwork and documents you might need in the event you have little time to get organized, need to flee or are unable to stay in your home.

Get a waterproof and fireproof box to store copies of important documents you might need after a natural disaster. FEMA suggests storing electronic copies of important documents in a password-protected format on a removable flash drive or external hard drive.

Make sure you copy and safe keep these documents in case of emergency:

  • Homeowners insurance policies
  • Health insurance policy and information
  • Deeds and recorded real estate documents, including appraisals from the title company
  • Mortgage information from your lender
  • Copy of your lease from your landlord
  • Living wills and advance directives from your attorney
  • Information on all investment and financial accounts from your bank or investment company
  • Driver’s license information and auto title from the secretary of your state or the Department of Motor Vehicles
  • Birth certificate and Social Security card from Vital Statistics and the Social Security Administration
  • Other important documents you may need at some point, such as tax returns, contracts, alimony or divorce decrees

Take a look at FEMA’s Emergency Financial First Aid Kit, which also includes a printable checklist of all the important documents to gather for your emergency box. Consider storing all original copies of important documents in a safety-deposit box at a bank or a secure offsite storage facility.

Bottom line

It’s important to be financially prepared if disaster strikes and you find yourself facing steep, unexpected costs. Budget for repairs to fortify your home against a natural disaster.

Review your insurance policies and whether you have the right coverage for your needs. Create an emergency document kit for easy, immediate access to your most important papers after a disaster.

It’s critically important to thoroughly document your losses after a disaster.

“Remember, you must be able to prove and substantiate the fair market value of your property before and after the loss using appraisals, receipts and any additional supporting documentation,” Rossi says. “Also, consider taking numerous pictures as evidence for your losses before the loss occurs. Bottom line: The more evidence supporting the valuation of your assets and damage incurred, the better.”

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