A disaster can greatly impact anyone's financial situation, and being prepared is the best way to lessen the blow. Disaster preparedness is an evolving phenomenon, especially with many of the natural disasters occurring throughout the world. Man-made disasters can also create a financial burden.
The following disaster preparedness tips regarding insurance and an emergency fund should help you be better prepared and maintain financial confidence after a disaster.
Review your insurance policies
Having the proper insurance goes hand-in-hand with having an emergency fund. If you don't have the cash sitting in an account to pay for the financial consequences of a disaster, insurance helps transfer your financial risk. Know your insurance coverage and options. Discuss risk and evaluate coverage you might not have thought about in the past.
Insurance programs for your property
Disastrous events can impact your financial situation if you are 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, such as earthquake insurance in California. However, even if you live in an area where there is not a threat of anything major happening, you should still consider being prepared.
Hurricane Harvey impacted hundreds of thousands of homes in Texas, and as of January 2018, 50 percent of claims on their homeowners' policies were denied 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, with policies covering the home and its contents under $400. Compare that to having no coverage and paying out of pocket to remodel or rebuild, and paying for flood insurance becomes much more worthwhile.
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Automobile claims fared better after Hurricane Harvey because flood coverage is available under comprehensive coverage.
Consider how and if your contents are covered, whether in your home or personal vehicle. Have pictures to back up your claim on your pricey possessions. Business owners should also consider business interruption coverage or policies that cover business operations. These types of coverages keep operating expenses covered, like payroll or the lease.
Insurance programs for your income
A disaster can impact your ability to earn a paycheck. There are a few types of programs that could be available to you through your employer, such as workers compensation, disability and life insurance. If you don't have access to employer benefits, disability and life insurance policies can be purchased as an individual.
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. Disability insurance pays as much as 60% of your income, which would definitely help maintain your lifestyle.
Short-term disability insurance usually pays benefits for up to six months, and long-term covers from six months to as long as retirement age. The financial impact from the loss of a breadwinner or secondary income provider can be catastrophic.
There are several ways to determine how much life insurance you should have. A simple method is to calculate 10 times your annual income. This amount should be enough to take care of final expenses, immediate everyday expenses and, more importantly, leave enough money so your family can adjust and transition.
Prepare an emergency fund
Having an emergency fund is important, especially since insurance programs don't cover everything. Setting aside a minimum of six months of your annual income is something that can help bring peace of mind by providing financial security.
In a disastrous event, you might find yourself displaced for weeks — or 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.
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.
Come up with a strategy that can help put money away systematically, such as saving 10 percent of your income for five years.
You might not be able to save six months' worth of income overnight. Come up with a strategy that can help put money away systematically, such as saving 10 percent of your income for five years. You could start this by setting up automatic transfers with your bank, or even having your employer send a percentage of your check to another account that isn't easy to access.
The only way to properly deal with an unexpected disaster is to be prepared for it to happen at any moment. In terms of financial confidence, having an emergency fund, insurance for your property and insurance for your income are some of the best ways to help lessen the impact of a major disastrous event.
(Editor's Note: This column originally appeared on Investopedia.com.)
— By Cesar de la Cerda, investment advisor at Envisionvest
