Millions of people are still reeling from the devastating effects of Hurricane Sandy.
The rest of the country is watching with sympathy and helping with relief efforts. All of us, those directly impacted by Sandy, and those who were not, can learn from this storm and make sure that we are properly protected financially from natural disaster.
People often buy a house and take out a homeowner’s policy at the same time. Then, they dutifully pay their premium every year.
What they often don’t do is revisit their insurance policy to make sure that they have enough coverage as years go by. Most people just don’t think much about their insurance–until they need it.
Here are some steps you can take to make sure that you have enough insurance to protect you and your assets in the event of a natural disaster or other home damaging event:
1. Have insurance.
Very few homeowners go without insurance, but many renters forego renter’s insurance.
Do not make this mistake.
As a renter, know that your landlord’s insurance policy covers damage to the rental unit, NOT your personal property. You must buy renter’s insurance to cover all of the contents you own in the rental unit. This policy will protect you from some natural disasters, theft, and fire, to name a few.
2. Choose replacement cost coverage over actual cash value coverage.
When you get a new insurance policy, you can choose between two different types of coverage – Replacement Coverage or Actual Cash Value Coverage.
Replacement cost coverage covers the full cost of the item that needs to be replaced. For instance, if you had a $500 computer that was 3 years old, your insurance company would give you the full amount to purchase a similar computer.
However, if you instead choose the slightly cheaper option of actual cash value coverage, for that same computer, your insurance company would first decide the life of the item, say 5 years for a computer, and then deduct depreciation (perhaps $100 for each year you have had it), and would only then give you $200 to replace your computer.
While buying actual cash value insurance may be slightly cheaper to buy initially, it is no bargain. Imagine all of the items in your home as well as your home itself. Then imagine only getting 30 to 50% of the true value to replace these things, and you can see that you would be in serious financial trouble.
3. Make sure you are covered for possible natural disasters.
If you live in the Northeast or the South anywhere near the coast, does your insurance cover hurricanes?
Check with your individual insurer, but often the insurance company will pay for wind damage from a hurricane, but not flooding. You would need to buy individual flood insurance to cover flooding from the storm surge from the hurricane. Yes, it can be pricey, but should a natural disaster occur, it would be worthwhile. [Edit: In some cases you are required to buy flood insurance when getting your mortgage.] In the Midwest, you may want to consider tornado coverage if your insurance won’t cover that or earthquake insurance in California.
The Christian Science Monitor explains that there are “two kinds of flood insurance for consumers: one for buildings and one for personal property.” Buildings can be insured up to $250,000 and personal property up to $100,000. The policies can range from “$580 a year, for up to $45,000 in both building and personal property damage, to $5,903 a year for up to $350,000 for combined building and personal property damage” (Christian Science Monitor) near high risk coastal areas.
I know these extra policies can be expensive, but let’s say you live in a high risk area and have to pay an extra $2,000 a year to protect your home from flooding from a hurricane. If you live in your house for 30 years, you will have paid approximately $60,000. A hefty investment to be sure, but if you live in a high risk area, you may have to use your flood insurance within the 30 years. If you do, $60,000 is much cheaper than what you would have to pay if your home and contents were ravished by hurricane flooding.
4. Have money set aside for paying the deductible.
While you may have a set deductible for things like fire and theft, the deductible is typically different for hurricanes.
The hurricane damage deductible “is often set as a percent of the hurricane costs. ‘It’s usually around 3 percent,’ says Ernst Csiszar, a professor of finance at the University of South Carolina in Columbia, although it can run as high as 5 percent of the damage costs'” (Christian Science Monitor).
You will also need to have money set aside for living expenses should you be displaced by the storm. Yes, your insurance may reimburse you for these costs, but it may take a few days or weeks to get that money.
Finally
From Hurricane Katrina to Hurricane Sandy, we continue to see natural disasters ravage our country. Before the next one strikes, take the time to make sure that your insurance is adequate and that you are protected in the event of a natural disaster.
Keep your house up to date on maintenance. Chances are they will fare better in bad weather this way.
Great point! It’s also useful for the grounds your house is on. For instance making sure your trees are healthy and cutting down damaged branches or those that could potentially fall could save you lots compared to a tree falling or breaking (I’ve seen a lot of those).
“Hurricane” Sandy was reclassified as a tropical storm just before it made landfall. Many policies written for homeowners contain large deductibles for damage caused by hurricanes; the deductibles are much smaller for tropical storm damages.
There is intense debate going on about the proper final classification – and large amounts of claims payments hang in the balance.
In NY Governor Cuomo told insurance companies that people wouldn’t have to pay deductibles for hurricanes. But I wonder if the water surge, which did most of the damage, falls under hurricane or flooding (I suspect flood insurance).
I have heard how a difference in classification could mean the difference in having to pay out thousands in a policy.
Great points to remember. Probably a good idea to schedule time each year with your insurance agent to review your personal situation and coverages and look for savings, potential problems, as well as strategize for the next 12 months.
Great idea Mike! We tend to want to “set it and forget it” when it comes to matters in personal finance but something like a yearly review of insurance can possibly save you money as well as make sure you have the coverage you need.
Great tips! Keeping an emergency fund can cover not only deductibles but also miscellaneous expenses that will come during recovery.
Choose the location of your home wisely and you reduce the chances of a natural disaster hitting you!
Wow, great article Melissa! It’s disasters like this that truly catch us off-guard. I remember Hurricane Katrina like it was yesterday, and Hurricane Irene that also hit the East Coast recently. Still, I think many of us were unprepared for this last one.
To be honest, I never considered many of the options listed in this article, a big part of that being for monetary reasons. But after a storm like this, I see how beneficial it can be to take advantage of these options.
Thanks for these suggestions!