Partners (Number 1, 2006)

Finances Count in Planning for Disaster

Though it’s the last thing we want to think about, being financially prepared for a disaster can literally mean the difference between life and death.

According to a survey of evacuees in the Houston Astrodome, the majority remained in the New Orleans area because they lacked transportation to get out or because lodging or shelter elsewhere was not available. The survey, conducted by the Washington Post, Kaiser Family Foundation and Harvard University, implies that lack of resources to own a car or pay for shelter away from their homes prompted Astrodome evacuees to remain in high-risk situations where their lives were at stake.

Keeping adequate cash on hand
Helping low-income families build assets not only moves them out of poverty but also paves the way for a healthy, resilient financial future. Families that have built an emergency savings fund, established a home equity line of credit or developed formal banking relationships are better equipped to weather either a tropical or a financial storm.

A Federal Reserve Bank of Philadelphia analysis of the financial services industry’s effectiveness responding to Katrina states, “without deposit accounts unbanked individuals could not benefit from direct deposit of payroll or other sources of income, electronic bill payment or cash from ATMs.... Even for the roughly 33 percent of lower-income ‘banked’ evacuees... any personal budget tightness, possibly coupled with no savings or line of credit to tap into, would have exacerbated their financial circumstances in the hurricane’s aftermath.”

We can and should use the lessons of Katrina to help ourselves and our most vulnerable families prepare financially for disaster. Aside from basic survival needs such as food, water, clothing, and fuel, families will need sufficient cash to tide them over. Because communications and utilities often do not function in the wake of disasters, storm victims cannot rely on debit cards or ATM machines for money.

How much is enough? Some experts recommend cash to cover a families’ basic needs for three to five days. This amount will clearly vary from family to family: hotel rooms are more expensive than staying at a friend’s or relative’s home, and larger families are more expensive to feed than smaller ones.

Organizing an “evacuation box”
In addition to keeping cash on hand, it’s important to make copies of critical documents and store them in a fire and waterproof container that can be located quickly and taken in the event of an emergency. This important step will go a long way in helping families recover from a disaster. Put important papers into a lockable, durable “evacuation box,” in sealed waterproof plastic bags. Store the box where you can get to it easily. If you must evacuate, keep the box with you at all times; don't leave it in your unattended car.

What should go into the box?

  • A small amount of traveler’s checks or cash.
  • Negatives for irreplaceable personal photographs, protected in plastic sleeves.
  • A list of emergency contacts including doctors, financial advisors, clergy, reputable repair contrac- tors and family members who live outside your area.
  • Copies of important prescriptions for medicines and eyeglasses, and copies of children's immuni- zation records.
  • Copies of your auto, flood, renters or homeowners insurance policies (or at least policy numbers) and a list of insurance company telephone numbers.
  • Copies of other important financial and family records (or at least a list of their locations) includ- ing deeds, titles, wills, a letter of instructions, birth and marriage certificates, passports, relevant employee benefits documents, the first two pages of the previous year's federal and state income tax returns, etc. Originals, other than wills, should be kept in a safe deposit box or at another location.
  • Backups of computerized financial records.
  • A list of bank account, loan, credit card, driver's license, investment accounts (brokerage and mutual funds) and Social Security numbers.
  • Safe deposit box key. (If you’re in a flood zone you may want to make sure that your bank’s boxes are well above flood level. Residents of the Gulf Coast are still trying to recover important documents and valuables from flooded bank vaults.)

Is your insurance adequate?
Insurance provides crucial protection from loss. Even with time to prepare for a disaster, you still may suffer significant, unavoidable damage to your property. That’s when insurance for renters or homeowners can be a big help. But how many of us have read our policies and really understand what they will (and will not) cover in the event of a disaster? Many people affected by recent disasters were underinsured, or worse, not insured at all.

If you own a home, buy full replacement or replacement cost coverage—at a minimum. This amount of coverage allows for the structure to be replaced up to the limits specified in the policy. Investigate buying a guaranteed replacement cost policy that will pay to rebuild your house, including improvements, at today's prices, regardless of the limits of the policy. You will need to have your home periodically reappraised to be sure the policy reflects the real replacement cost.

Maintaining sufficient emergency funds to cover any deductibles to your insurance will help you rebuild after an emergency.

You should also buy a policy that covers the replacement cost of your possessions. Standard coverage only pays for the actual cash value, that is, the replacement cost discounted for age or use. Use your home inventory list to check that your policy's coverage matches the value of your possessions. An up-to-date video inventory also helps. Big-ticket items such as specific jewelry, collectibles, artwork, or furs may require additional coverage.

Maintaining sufficient emergency funds to cover any deductibles to your insurance will help you rebuild after an emergency. Some homeowners policies may have a 2-to-4 percent hurricane deductible requirement built into the policy.

If you find it difficult to obtain private coverage because of a recent disaster, check state or federally operated insurance pools. Their premiums often run higher than market rates, but higher premiums are better than no coverage.

If you rent, consider locating outside a high-risk flood area or away from a fault line. Regardless of your location, renters insurance can pay for damaged, destroyed, or stolen personal property—liabilities that won’t be covered by your landlord’s insurance.

As with any insurance, it’s important to be clear about what a policy will cover. Some policies cover more than others. For example, will the policy pay for living expenses if you have to live somewhere else temporarily or for damage from sewer backup?

Whether buying homeowners or renters insurance, those with home offices should talk to their agents to determine what items in the office will be covered or not covered. Some policies automatically extend coverage to computer equipment and a few other items of business property. If necessary, acquire additional business coverage or buy a separate small business policy.

Make sure you buy the insurance you need to protect against the perils you face. For example, homeowners insurance doesn't cover floods and some other major disasters. It’s important to be very clear about what the policy will and will not cover, and how the deductibles work. READ YOUR POLICY! Prices for insurance vary and it’s important to comparison-shop for the best coverage at the best price.

More on Disaster Planning

The following websites were an invaluable resource for this article and provide important information on disaster planning.

Financial Preparation for a Disaster:
www.sqvalleyredcross.org/twp/finances.htm

Preparing for Financial Disaster, Illinois CPA Society:
http://www.emaxhealth.com/49/4180.html

Financial Planning: A Guide for Disaster Preparedness:
http://www.redcross.org/services/disaster/beprepared/ FinRecovery/FinPlan/

Emergency Preparedness Toolkit:
http://www.operationhope.org

Free Home Inventory Software:
http://www.iii.org/

Flood insurance isn’t only for high-risk areas
It’s not just high-risk areas that experience flooding: between 20 and 25 percent of flood insurance claims come from medium or low flood-risk areas. Affordable insurance for flood damage, which is not covered by your homeowners policy, can be acquired through the National Flood Insurance Program (NFIP), regardless of the risk. Coverage above the $250,000 limit for property and $50,000 limit for contents stipulated in the NFIP insurance is available on the private market.

The typical flood insurance premium is approximately $400 a year for an average of $100,000 of coverage. This expense is modest compared to paying back a $50,000 disaster home loan, for example, which would cost an average of $240 a month for a repayment period of 30 years. But you have to acquire insurance well in advance of a disaster—policies go into effect 30 days after the policy is purchased.

Being prepared calls for planning
Remember that not all financial emergencies are the result of natural disasters. The three major factors contributing to families filing bankruptcy are: death, divorce and a major illness. Be prepared to secure your financial future by having quality personal insurance, which should include adequate health, life, and disability insurance coverage. If you are responsible for parents or other loved ones as they age you may want to look into long-term care insurance.

The saying goes that being prepared is “80% planning and 20% execution.” Access to cash reserves, a good banking relationship, well-organized documents, and adequate homeowners (or renters) and personal insurance will help families weather the storm.

This article was written by Nancy Montoya, regional community development manager in the Atlanta Fed’s New Orleans branch.

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