Being Financially Prepared for a Disaster

Disasters happen. There’s simply no way around it, and most of the time there’s nothing we can do about them. And most disasters are extremely rare, so this makes for a devastating combination. But look no further than early 2011 and see that disasters can and do happen, and can affect millions of people. Some of the most notable examples are the earthquake and tsunami in Japan, the tornado outbreak in the southeast United States, and the massive flooding in the Midwest. Each of these scenarios have countless numbers of people.

You might think that because these are well-known environmental risks for the respective areas that most people were prepared, but sadly that usually isn’t the case. Sure, people in the Mississippi River valley know that flooding is always a danger, most areas are susceptible for strong storms and tornadoes, and that Japan has earthquakes. But mother nature is still unpredictable. At the very least we can use these devastating situations to learn and better prepare ourselves.

Protecting What You Have

Above all else you need to protect your assets. While it is true that things can be replaced, when you have so much tied into the things you own like your home, car, and all of your possessions, if something were to happen and those needed to be replaced you’d be in a pretty bad financial position if they weren’t covered. It may seem unthinkable if you own a home to not have property insurance, but for many people that is a reality. According to early estimates, about 25% of homeowners in Alabama do not carry property insurance. Many of these people just recently lost their homes to the storms and now have absolutely nothing.

As heartbreaking as that may be, it is pretty common. A big reason is that most people have the “it can’t happen to me” attitude. Statistically, the chances of your home being hit by a tornado, unexpected flood, or burned to the ground by a lightning strike are about as good as playing the lottery. So it’s easy to know that because the chance of something happening is rare you can save money by dropping coverage. You also have some situations where the money is a factor and those who are unemployed and facing a hardship may drop coverage out of necessity. Bad idea. The thing is, property insurance is incredibly inexpensive compared to what it protects. For just a few hundred dollars a year it can literally cover well over $100,000 in property. Not only that, most policies cover intangible things like providing money for temporary housing while you rebuild.  So, if you can find a way to scrape together enough money each month to keep your lights on, you should also make it a priority to come up with the money to stay insured.

Renters, you aren’t exempt. Sure, your landlord probably has the building insured, but guess what? None of your personal possessions are insured. Fry your HDTV and new Macbook thanks to a lightning strike? Too bad. Tornado carries everything you own away? You’re out of luck. Unless you have a renter’s policy your personal belongings are not insured even though the building may be. It’s up to you to seek out this insurance, and given how many electronics and gadgets we have these days the value of these possessions can be strikingly high. For literally $200-$250 a year you can make sure you’re stuff is insured.

Assessing Coverage

If you already are insured it’s time to reexamine your coverage. Needs change over time, and the policy you purchased ten years ago may not be right for you today. Also, take a look at your exclusions. You’ll be surprised what isn’t covered if you read the fine print. It can be scary to see all the potential problems that leave you vulnerable. For example, do you have a basement? If so, there’s a good chance something could happen to flood it even if you aren’t living right next to a river. A heavy rain could lead to seepage in the foundation, the sump pump could burn out and if it can’t eject the water from the sump it could flood the basement. Or even a problem with your local sewer system could create a backup that enters the home. All of these common problems are generally not covered under a traditional homeowners policy, and may not even be part of an additional flood policy.

I found this out the hard way when we had a pump stop working and sewer water started to flood the finished basement. Of course, the house was only four years old so it was a “this won’t happen to me” moment. The problem is insurance didn’t cover that. After speaking with our agent we found we could add a rider to our policy that specifically covers sump pump failure, sewer backups, etc. for just 12 dollars a month. We now carry that coverage, but only after learning the hard way.

I also recently heard a story from someone who lost a bunch of electronics thanks to a single lightning strike. It fried expensive TVs, video game systems, audio visual equipment, destroyed wiring, you name it. Easily thousands of dollars worth of damage. So it wasn’t even a major natural disaster that caused tremendous damage. The good news is that his insurance policy covers that. The bad news is he wanted to save a little money on the premium so he opted for a high deductible. That deductible now cuts substantially into recovering the damages.

So, blow the dust off your old policies and make sure your coverage is what you think it is. Make sure you’re not only properly covered, but make sure your deductibles are what you think they are, inquire about any discounts, or even shop around if you feel you’re paying too much. A few minutes of your time can go a long way in helping you prepare for the unexpected and can save money.

Be Financially Prepared

Having the right insurance is obviously a big part of preparing for a disaster, but there are things you can do to help your financial situation in the time immediately following such an emergency. First, and this probably goes without saying, but you need to have an emergency fund. I know, you’ve heard it a million times before, but it gets repeated because having access to cash is invaluable in a time of need.

Not only do you want to have that emergency savings for the little unexpected emergencies like a broken appliance or repair, but in the event something significant does happen and you do have to rely on an insurance claim it can take time before the money starts flowing. Without having savings to tap into you may be at the mercy of the insurance company and receive money on their schedule. Or even worse, your only option may be to use credit cards and rack up debt while adding stress to an already stressful situation. With some savings put aside you can use that money to take care of your immediate needs following a disaster with ease.

One last thing to consider is that in a large scale disaster there will be major disruptions to infrastructure. Without electricity or telephone/internet access it may be impossible to rely on credit or debit cards to purchase the things you need after an emergency. In this scenario cash is king. But the other problem is that a lot of people these days operate on virtually a cashless basis. That’s fine when it is business as usual, but when your life gets turned upside down and you open your wallet and have nothing but a wad of plastic, that isn’t going to be very helpful. Sure, you don’t want to carry a huge wad of money around with you just in the rare event you might need it, but if you’re someone who relies almost entirely on credit or debit just try to keep a little cash on you, even if it’s only twenty bucks. Consider it your immediate emergency fund.

Author: Jeremy Vohwinkle

My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.

5 comments
Justin
Justin

Along with this I think it's important to have a serious supply of food and water. My wife and I have 2 years of food supply in our home. If a disaster were to hit we could take care of our home and be a great help to others in need as well.

jb
jb

Seems like you're advocating a ton of insurance, and that may not be right for a lot of readers.

In general, a good rule of thumb I have heard often and apply myself is "If I could afford to replace the item without hardship, don't insure it." So if you can afford to replace your sump pump, why pay the extra insurance?

Either way you are taking a bet. Buying insurance on items you could afford to replace is like betting against the casino in gambling, you're betting you'll have something bad will happen and you'll make more money on the policy than the insurance company will. Just remember, like a casino, the insurance company knows the odds and are betting against you, and they have the house edge.

Note that the above advice doesn't apply to insuring items that would cause you major financial hardship if they fail.

Raven
Raven

Insurance is a good start, but it's only a start.

I keep a good emergency kit in my car, food I can eat w/o electricity (canned/prepackaged), some supplies of bottled water, firearms and ammo for protection. I also keep about $1000 of my emergency fund in my home in cash. We live in hurricane zones so I'm focussed on that particular disaster.

Some may consider me going overboard, but I hate relying on others for minor things (ride to get my car from the shop for example) so in a disaster, I can't even think how I'd feel if I was unprepared and had to rely on others for life sustainment.

I just cobbled together a decent first aid kit (capable of handling trauma, wounds larger than band-aid and antibiotic ointment like most commercially available. (including tourniquet, chest seal for tension pneumothorax, blood clotter (quik clot), trauma dressings (also called Israeli bandage), CPR mask, gloves, gauze and large bandages the size of a maxi-pad). I keep firearms in my home and carry for protection so I keep supplies that can stop bleeding if an accident or incident happens. The kit is equally useful for bad slips of a knife while cooking, compound fractures and associated lacerations from car accidents, etc.

I also keep some MRE parts in my car, some road flares, a 25lb fire extinguisher, reflective vest, latex gloves, box cutter and 2 flashlights with spare batteries all in my car. I used to keep a gallon of water too, but after a winter in Cleveland, that sounded like a bowling ball rolling around my trunk.

I've used about 10 road flares in the last year by stopping and helping people in accidents or stranded along the highway with no visibility. It's easy to overlook, but having lost a coworker to an accident in similar circumstances, I always have some way to signal to people doing 85mph to move over and not flatten me.

Jeremy
Jeremy

JB, you're missing the point. It isn't the cost of say a sump pump that you have to worry about. In my case it's a finished basement that would probably cost over $50,000 to replace if there was significant water damage due to a failure.

You're not insuring the parts that fail, but the damage the failure causes. I'll gladly pay $12 a year to protect what could be tens of thousands of dollars in possible damage.

jb
jb

Thanks Jeremy, I understand now what you are insuring, and paying $12 to insure $50,000 sounds like it makes sense since $50K probably amounts to a major financial hardship.

But my comment still stands, in general you should decide if you can afford to replace what you are insuring before springing for the insurance. Should I buy renters insurance for $200/year (which probably has a payout cap of $10K and a $1K deductible) when I have the funds available to replace all of my belongings? In my case, no.

Same decision process here as on the warranties that Best Buy and other retailers try to sell consumers.