Superstorm Sandy, the tornado that struck Oklahoma in May and other recent natural disasters are stark reminders that an unforeseen disaster, whether it's natural or man-made, can wreak financial havoc in any household. Safeguarding your finances from a hurricane, tornado, flood, earthquake, fire or other calamity is one of the most critical components of financial planning. What follows are important steps you can take to prepare for the unexpected before it happens and improve the chances that you and your loved ones will be able to recover from a disaster, financially and emotionally, in relatively short order.
When disaster strikes, a comprehensive and personalized insurance program can prove to be a financial lifeline. You need insurance to shield all your major assets, as well as yourself and your family members. Insurance can help you protect the following and more:
If the loss of your paycheck would cause significant financial harm to you or your loved ones, it's a risk you need to guard against. Disability insurance provides income in the event you're unable to work for an extended period due to sickness or injury. Life insurance provides a tax- free lump sum to your survivors in the event of your death. How much life insurance you need depends on your personal circumstances, which change over time, so you need to reassess your need annually. Check with your employer or state insurance department to learn more.
Your home and its contents
If you own your place of residence, review your homeowner's insurance policy at least annually to make sure you maintain the right types and levels of coverage to protect your home and its contents. If you're a renter, you need a renter's policy to protect your contents, and as with homeowner's insurance, you should reassess your coverage annually.
Whether you have homeowner's or tenant's insurance, it pays to have a policy that covers “replacement cost” rather than “cash value.” In the event of a loss, replacement cost coverage is designed to pay you enough to replace your property with something equivalent at current price levels. Cash value coverage would pay you less than replacement cost to account for the age or use of your property. Replacement cost coverage typically costs more than cash value coverage.
Be aware of what your policy will and will not cover. For example, if you have a homeowner's policy, will it cover your living expenses if you have to move to temporary quarters after a disaster? And will your homeowner's or tenant's policy cover a hurricane, flood or earthquake? Many standard policies do not cover such events, but supplemental policies are available.
Take photos or video of your belongings inside and outside your home to serve as an inventory for insurance purposes. Keep one copy of your inventory in your home, on a shelf, and in a lockable, fireproof file box; keep another in a safe deposit box or another secure location away from your house.
For expensive purchases, such as jewelry, antiques, collectibles and electronics, it helps to keep receipts or other records that document when you purchased the item and how much you paid for it.
Automobile, boat, motorcycle or recreational vehicle insurance protects you from financial loss if the vehicle is damaged, in addition to providing coverage if your vehicle is stolen or you're sued in connection with an accident.
If you don't have health insurance through your employer, check with your state insurance department for a list of private-sector companies that offer health insurance, including companies that will participate in the Health Insurance Marketplace (the health insurance exchange), which is scheduled to open for business January 1, 2014. Once you're enrolled in a health plan, know what the plan covers and what you'd have to pay out of pocket if you were to be injured in a disaster.
An emergency fund is a reserve of cash you can dip into in the event of a critical, unexpected need.
For general financial planning purposes, financial planners typically recommend reserves to cover three to six months of ordinary living expenses. You may need to set aside more money if you are single, married with one wage-earner, or have ongoing medical needs. The best place to keep an emergency fund is an account where your money will be safe and easy to access quickly, such as a money market account at a bank or a money market mutual fund account. If and when you withdraw money from your emergency fund, try to restore the balance quickly so you'll have enough cash available for later use if needed. For more information, read our article “Start saving and investing now.”
Also consider keeping a small amount of cash on hand in a secure location such as a fireproof safe. This cash is separate from your emergency fund; it should be enough cash to cover
immediate needs such as food, clothing, shelter and fuel in the event that a disaster causes loss of access to banking services and ATM networks.
You need to keep important documents and certain other items secure in the event you will need them in a disaster situation. Consider storing original documents, photographs, and computer backup disks in an off-site safety deposit box, with copies of your original documents at home in a fireproof and waterproof metal box or safe.1
The Federal Emergency Management Agency offers the Emergency Financial First Aid Kit, which can help you identify and organize key financial records and provides a quick reference file for important financial documents.
Your financial advisor can help you incorporate disaster preparedness as part of your overall financial plan, including finding ways to save money toward an emergency fund. Your advisor can also help you decide on what should happen in the event you cannot manage your finances
after a disaster. For more information, read our article “Planning for Incapacity.”
Also visit www.tiaa-cref.org for broader Financial Education, including a variety of resources to help you improve your financial well-being.
Being prepared financially is one small part of overall disaster preparedness.
The material is for informational purposes only and should not be regarded as a recommendation or an offer to buy or sell any product or service to which this information may relate. Certain products and services may not be available to all entities or persons.
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