You might be flying high on life, then out of nowhere some sort of disaster bursts your bubble!
A disaster can impact anyone’s financial situation and some more than others. Being prepared is the best way to lessen the financial impact. Disaster preparedness is an evolving phenomenon, especially with many of the natural disasters occurring throughout the world. But on the wake of 9/11’s 17th year anniversary, man-made disasters can also create a financial burden. I can honestly say that being prepared helps, but nothing really prepares you for the emotional aspect of the situation you are in and for how long you might be in it. As a financial advisor, I advise people all the time about preparing for many specific events that are important to them, but I also bring to light being prepared for the unexpected. This article is about disaster preparedness tips involving insurance and establishing an emergency fund that should help someone be better prepared and maintain financial confidence afterwards.
Your Insurance Programs
Having a proper insurance program works hand in hand with your emergency fund program. Think about it, you don’t have the cash sitting in an account, insurance helps transfer the financial risk. Know your insurance coverage and options! I wouldn’t be a legitimate financial advisor if I didn’t discuss risk and advise reviewing insurance coverage options and evaluate them. Evaluating coverage that you might not have thought about in the past.
Insurance Programs for Your Property
Disastrous events can impact your financial situation if not properly insured for a major loss against your home, car or business properties. Some areas have unique insurance programs to help with known risks, like earthquake insurance in California. However, if you live in an area where there is not a threat of anything major happening, why bother? With Hurricane Harvey, the catastrophic event impacted hundreds of thousands of homes in Texas and as of January 2018, fifty percent of claims under their homeowners policies were denied (Texas Department of Insurance, Harvey 2018 report). Simply, because a majority of homeowners didn’t have flood insurance. When a home isn’t in a flood zone, the coverage is generally less expensive. In some conversations I have had, some individuals that had flood insurance and weren’t required to have it, paid premiums in the range of $400 per year. Compare that to having no coverage and having to pay out of pocket to remodel or rebuild, in worse case scenarios simply sell the lot. Automobile claims fared better do to flood coverage is available under comprehensive coverage. Also, consider how and if your contents are covered whether in your home or personal vehicle. Have pictures to backup your claim on that Van Gogh. Business owners could also consider business interruption coverage or policies that cover business operations, these types of coverage's keep operating expenses covered, like payroll or the lease.
Insurance Programs for your Income
A disaster can have an impact on your ability to earn a paycheck. There are a few types of programs that could be available to you through our employer, such as workers compensation, disability and life insurance. If you don’t have access to employer benefits, disability and life insurance policies are pretty accessible to individuals. The 9/11 attack affected many people while they were starting their day, for those who were survivors and sustained injuries or even illness due to the dust years later. It was estimated that over 4 million dollars in workers compensation had been filed just four months after the attack (IRMI, December 2001). Disability insurance is for a disability that happens off the job and generally comes in two forms, short-term and long-term. Disability could pay benefits for either an illness or injury. In the case of a disaster, it could go either way as we have seen. Disability insurance usually pays as much as 60 percent of your income, which would definitely help maintain your lifestyle. Short-term usually pay benefits for up to six months and long-term steps in from six months to as long as retirement age. The 9/11 attack took 2,977 lives (intentionally omitted the hijackers), which left a tremendous void in many families. The financial impact from a loss of breadwinner or secondary income provider can be extremely catastrophic. There are several ways to determine how much life insurance you should have. A simple method, is to calculate ten times your annual income. This amount should be enough to take care of final expenses and immediate lifestyle expenses. More importantly, leaving enough money so a family can readjust and transition.
Emergency Fund Program
Having an emergency fund is important, especially since insurance programs don’t cover everything. Having an emergency fund of a minimum six months of your annual income is something that can help bring peace of mind by providing financial security. I once felt comfortable suggesting having three months of annual income saved, as a conservative goal. I now easily suggest six months as a reasonable goal to have readily available. In a disastrous event you might find yourself displaced for weeks even months before something significant happens. It could take months to have an insurance claim approved or even authorize a payment for temporary lodging. You might have to buy new clothes due to leaving with the clothes on your back or what was packed. What if your job is temporarily shut down due to a disastrous event? Businesses that were damaged physically or lost equipment, might take some time to reopen. While the business owner might care about you, they may not be able to provide you with a paycheck while you are not working, and they aren’t required to do so.
Let’s be honest, you might not be able to save six months’ worth of income over night. So, come up with a strategy that can help put money away systematically. Here is a simple strategy that can help you save 6 months’ worth of income in five years. Save ten percent of your income for five years (try it do the math). You could start this by setting up automatic recurring transfers with your bank or even have your employer send a percentage of your check to another account that isn’t too easy to access.
In terms of financial confidence, all of these things I mentioned should help you with what I believe is key to being efficient and resourceful and lessen the impact of a major disastrous event.
Written by: Cesar de la Cerda, founder of EnvisionVest, LLC, located in Houston Texas (9.11.18)