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Disaster Planning: Protect Your Finances and CreditPrepare Your Home - When disaster strikes, it can leave your world and your finances in ruins. In addition to avoiding personal injury and even death, preparation can help lessen the degree to which a disaster affects you financially. Investing a small amount of your time and money in making sure that you are prepared for some of the more challenging circumstances that life has to offer can make a significant difference in how well you and your family are able to come through a disaster situation. Information is the first step in disaster planning. Naturally, the most important information to have is that relating to keeping life and limb safe. However, once you’ve taken the steps to learn how to stay safe physically, the next move should be to find out about how to mitigate the fiscal damage a disaster can bring. There are numerous types of natural disasters, but the basic steps for preparation are similar, whatever region you may live in. Whether dealing with storms, floods, earthquakes, or other types of disasters, you should expect that in the aftermath, basic services – such as water and electricity – may be disrupted. You’ll need to bear that in mind when making disaster preparations. Know Your Risk - Residential fires occur frequently in the United States. Although your risk of experiencing a natural disaster depends on where you live, every state has experienced some type of natural disaster. Floods and flash floods are the most common, occurring in all 50 states. Although hurricanes primarily damage islands and coastal areas, they can move inland, spawn dangerous thunderstorms and tornadoes, and produce rain that can cause massive flooding. Tornadoes occur most commonly in Texas, Florida, and throughout the Southeast and Midwest, but they can strike almost every state. California is prone to earthquakes, but since the turn of the 20th century, earthquakes have occurred in 38 other states and caused damage in all 50. To find out what disasters are most likely to strike your community, contact your local emergency management office or American Red Cross chapter. Reduce Your Risk - You can do several things to reduce the likelihood that a fire, storm, or other natural disaster will destroy your property and possessions. First, before buying, building, or renting a home, evaluate the structure's location. Is it in an area at high risk for some type of natural disaster? If so, consider living somewhere else if you want to reduce your risk. If you are building a home, make sure that it is constructed according to the existing building code, and have a building inspector, architect, or fire department inspector suggest ways to protect the house from certain hazards. If you already own or rent a home, you may be able to improve it substantially without spending a lot of money. For instance, you may want to bolt tall furniture to the walls and install latches on cupboards to prevent damage and injuries that can occur when your possessions fall during an earthquake. Obtain Adequate Insurance - Although you can't prevent a disaster from destroying your home or possessions, you can prevent it from destroying your finances by purchasing adequate insurance. If you own a home, you'll need to buy a homeowners policy that offers replacement cost coverage or guaranteed replacement cost coverage. While a standard homeowners policy pays only for the actual cash value of your home, replacement cost coverage will rebuild your home up to the limits of your policy, regardless of its actual cash value. Guaranteed replacement cost coverage provides further protection and will pay to rebuild your house regardless of policy limits, even if it costs more to rebuild your house than it did to build it originally, as a result of increased material and labor costs and building code changes. It may be a good idea to opt for replacement cost coverage for your personal possessions as well. The drawback is that this coverage may be significantly more expensive than standard coverage. In addition, consider specialized types of coverage that will insure your property specifically against various types of natural disasters that are likely to occur where you live.
Flood Insurance - Homeowners policies don't cover damage from flooding. However, you can purchase flood insurance separately. The cost of flood insurance depends on many factors, including the type of occupancy (e.g., single family, nonresidential), the amount of coverage, and the location, design, and age of the building. Currently, the average annual premium for $100,000 of flood insurance coverage is approximately $542. (Source: FEMA, 2009) If you have a mortgage on your home, it's likely that your lender required a flood hazard search on your property at the time you obtained your mortgage in order to comply with federal standards. If your home turns out to be in a flood hazard area, you will be required to purchase flood insurance. However, even if you own your home outright or don't live in an area that lies in a flood plain, consider purchasing flood insurance to protect your property. Flooding doesn't happen only along the banks of rivers, lakes, or other bodies of water; it can also occur in other low-lying areas or in areas where drainage is poor, or it can result from heavy rains, melting snow, and backed-up sewers, among other things.
Earthquake Insurance - Homeowners and renters policies do not cover earthquake damage, so if you want to insure your property against this type of natural disaster, you'll need to purchase earthquake insurance. Unfortunately, earthquake insurance is expensive. Premiums vary widely from state to state depending on many factors such as the type and age of the structure and its proximity to fault lines, and you usually have to satisfy a high deductible before your policy will pay for damage. Most earthquake policies cover only the actual structure, so contents may have to be insured separately. However, if you live in an area where earthquakes are common, you should consider purchasing this insurance despite its expense. Document Your Home and Possessions - Videotape, photograph, and/or make a written inventory of your property and personal possessions, then either give it to a friend or relative or store it in a safe place away from your home. If catastrophe strikes, you can use the inventory to refresh your memory and provide details about the property and possessions that were damaged or destroyed, making it much easier and less traumatic for you to support your insurance claim.
Keep Important Documents in a Sturdy and Fire-proof Safe - You may want to keep most of your important documents and valuables in a safety-deposit box to ensure they are safe from fire and natural disasters. However, if you use these documents or possessions frequently, you may prefer to keep them in your home. No matter where they are stored, make sure they are readily accessible if you need them in a hurry when a disaster strikes. One way to do this is to store them in a box that can be carried out of your home quickly and easily. This evacuation box should be waterproof and fireproof and should contain marriage and birth certificates, insurance paperwork, titles, wills, passports, and a copy of the previous year's tax return. You may also want to put a list of important phone numbers and addresses in the box, a list of your bank account and Social Security numbers, and copies of your safety-deposit box keys and car keys.
Have an Emergency Cash Fund - It's important to have access to cash to help you survive the weeks or months following a disaster. First, even if you have insurance, you will likely have to pay a deductible before your coverage kicks in, and your insurance won't compensate you for all of your increased living expenses if your home is partially or totally destroyed. In addition, people living in areas that experience severe damage may lose their jobs temporarily or permanently when businesses are unable to open because the business has been damaged or destroyed or because utilities are cut off. Although some disaster help is available from charities or from the government, it won't be enough to cover all your expenses. You should aim to keep funds for at least three to six months' worth of living expenses in an emergency cash reserve account (e.g., a savings account or money market fund) that can be easily liquidated. What to do After a Catastrophe Strikes Contact your insurance company - After a catastrophe strikes your property, call your insurance agent or company as soon as possible and ask that an appraiser be sent right away. Ask for advice about making emergency repairs, but don't hire any contractors until clearing it with your insurance company. Find out if you are entitled to any money for living expenses under your insurance contract. While you're waiting for an appraiser, take photos of damage to your property and gather records that you have, including your household inventory and receipts for expensive items that you might own. If you don't have a household inventory, you'll have to rely on your memory and old photos of your home to make a list of things destroyed. Providing as much information as possible about losses will help ensure that your claim is settled quickly and fairly. You should also keep careful notes of your conversations with the adjusters and check over all paperwork and supporting records to make sure the settlement is fair. If you believe it's not, you can appeal the settlement offer to your insurance company or try to settle your claim through arbitration. After you receive your settlement, keep it in a liquid account, because you'll need the money soon to replace, repair, or rebuild your property. Find out what government, private, and nonprofit assistance is available to help you deal with the catastrophe - After you are struck by a catastrophe, you should seek information and/or financial assistance from one or more of the government agencies, private programs, or nonprofit organizations that help victims of natural and other disasters. If you have lost property in a fire, contact your local fire department or American Red Cross chapter for information on what assistance is available in your community. If you are the victim of a natural disaster, numerous other sources of help may be available. For instance, you may be able to apply for help from state and local government disaster relief programs, and you can also seek assistance from the Federal Emergency Management Agency (FEMA). FEMA can provide emergency housing or assistance to cover the cost of living expenses and hotel accommodations. You may receive a low-interest loan or a cash grant. If you don't have insurance, or your insurance is inadequate, you may be eligible to receive a low-interest loan from the Farm Service Agency (FSA) or the Small Business Administration (SBA). You can also apply for a cash grant from FEMA if you don't qualify for a loan. For more information on disaster relief programs, contact the American Red Cross or FEMA. Beware of Scams in the wake of a disaster. Scammers always take the opportunity to exploit those in need. After a disaster, these primitive beings come out of the woodwork to steal money from victims. Always follow your instinct and don't provide your personal information to a stranger. Watch out for loan scams as well. Monitor Your Credit Files - When the time is right, make sure you add fraud alerts to each of your credit reports. You need to do this immediately following a disaster, although we really recommend that you do this all the time irrespective of a disaster. In fact, do it today if you can. A fraud alert is simply a message that you ask the credit reporting agency to place at the top of your credit file asking all potential creditors to contact you before giving anyone credit in your name based on an application that they receive. After a disaster, this is especially important because some of your personally-identifiable information may have blown into the hands of an id thief, via the winds of a hurricane or tornado. So having a fraud alert on your credit file is one way to protect yourself from identity theft and to protect your credit history. Preparing for natural disasters and catastrophic events can make a real difference in how well you and your family are able to come through the event. Taking steps to secure and protect property can help to reduce losses that can have a devastating affect on finances. Fortunately, there is a wealth of information available to help you to do those things as successfully as possible, as well as numerous resources to help in recovering and rebuilding after a disaster has struck. Income Tax Considerations of Catastrophe Deductibility of casualty losses - A personal (nonbusiness) casualty or theft loss is deductible if the loss exceeds $100 and your total casualty and theft losses in a year (in excess of the $100 per loss floor) exceed 10 percent of your adjusted gross income (AGI). However, for the loss to be deductible, you must file an insurance claim (if the loss is covered by insurance). The amount deductible is the lesser of the decrease in fair market value of the property as a result of the casualty, theft or the adjusted basis in the property before the casualty or theft, minus any insurance or other reimbursement received or that is expected to be received. Special rule for residents of federally-declared disaster areas - If your residence was located in a federally-declared disaster area, you can deduct a casualty loss resulting from the disaster in either the year the loss occurred or the year preceding the loss. For more information about tax considerations, see IRS Publication 547, Casualties, Disasters, and Thefts (Business and Nonbusiness). Summary of Disaster Planning:
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