The aftermath of natural disasters can be devastating both emotionally and financially. With news coverage worldwide, we all know what this aftermath can look like. And the last thing anyone should have to worry about when they are recovering from a disaster is whether they will be able to afford the cost of repairing or replacing the resulting damage to their property. So, we at PAX (San Antonio) want to make sure our clients are well-prepared should anything happen to them.
Traditional homeowner’s, renter’s and auto insurance policies can cover damage caused by certain kinds of natural phenomena, but for other types of damage, specific insurance policies are necessary. Insured individuals should read the exact terms of their existing policies carefully or work with a financial advisor who is experienced with insurance and can help them choose the right plans.
Natural Disaster Coverage in Homeowner’s and Renter’s Insurance Policies
It is important to carefully read your individual policy or to enlist the services of a personal financial advisor, but homeowner’s and renter’s insurance policies generally cover damage caused by fire, wind, rain and ice, including damage resulting from certain natural disasters. However, these policies will not cover damage caused by floods or rising water, although they will cover damage from heavy rain, such as roof damage.
Generally, insured individuals should elect to be covered for “replacement” cost, meaning that they will be reimbursed for the actual cost to replace their belongings with ones of similar kind and quality. A replacement cost policy provides more coverage than the alternative type of coverage, “actual cash value,” which reflects the fact that the value of one’s possessions decreases, or depreciates, over time due to usage and age.
For example, a television someone purchased a year ago would be worth less now than the price they originally paid for it. With an actual cash value policy, the insured would be reimbursed only for the TV’s current value and would have to spend more money to buy a comparable TV now. A replacement cost policy enables the insured to use the proceeds from the insurance policy to cover what it would more accurately cost to replace one’s damaged possessions.
Homeowners should also make sure that they have an inflation clause on their policy, which means that their coverage will fully cover building costs, which generally rise over time. Additionally, if homeowners have made property improvements, they should make sure that the new value of their home is fully insured.
Finally, both homeowners and renters should check their policy’s terms for their coverage for temporary living expenses, which the insurance company will advance them to pay for reasonable alternate living arrangements if they are necessary after a natural disaster.
Natural Disaster Coverage in Automobile Insurance Policies
For insured vehicles, most damage that is the result of a natural disaster is covered under comprehensive coverage, which is usually optional. This coverage insures costs incurred from damage caused by something other than a collision with a vehicle or another object. The policy will either pay for repair costs, or if the damage is extensive enough, it will pay the insured for the actual cash value of the car prior to the natural disaster.
Natural Disaster Insurance
Flooding and earthquakes are the two major natural disasters that are not covered under traditional homeowner’s and renter’s insurance policies (though they are generally covered under comprehensive automobile insurance policies), meaning that these risks to one’s structures and belongings will need to be insured separately.
Flood insurance is critical to obtain because many natural disasters can cause flooding, and any damage caused by rising water will not be covered by homeowner’s and renter’s policies, regardless of the cause.
In the San Antonio area in particular, floods, while not common, nevertheless do occur. Flood insurance is important to consider, especially for those living within a flood plain. Individuals should either evaluate their own exposure to financial risk as a result of flooding or work with a financial planner to estimate how this risk should be addressed in their financial plan.
The federal government is involved with flood insurance through the Federal Emergency Management Agency (FEMA), which contracts with private insurers to offer flood insurance. In many areas of the United States, individuals can also directly purchase federal insurance policies through the National Flood Insurance Program.
Flood insurance covers the direct physical loss caused by floods. To cover both personal contents and structural damage will require purchasing two different policies, with personal property insurance only available on actual cash value terms. Private insurance will be necessary to provide coverage beyond $100,000 in contents and property loss, and $250,000 in structural loss or damage. Further, flood insurance requires a 30-day waiting period before coverage begins, so it is important to purchase insurance well in advance of concerns that a flood may occur.
While earthquakes are traditionally associated with California and to a lesser extent the rest of the West Coast, property damage can occur far from the center of a quake, including damaging foundations and causing walls to collapse.
Additionally, in areas that have experienced increased oil and gas drilling activity in recent decades (such as in Oklahoma), there may be an increased risk of earthquakes and seismic activity. Earthquake insurance is relatively inexpensive in low-risk regions but can cover extensive damage if an earthquake does occur.
Self-Insuring One’s Natural Disaster Risk
Premiums for natural disaster policies in high-risk areas can be expensive, and some individuals may want to consider self-insuring the risk of damage through their own savings. To evaluate this decision, financial planners can help clients determine how well-funded they are for natural disasters and whether self-insuring is the best financial decision for them. There are many costs involved in repairing or replacing one’s owned or rented property, including paying potentially elevated building costs post-disaster, as well as covering temporary housing costs if one’s residence becomes uninhabitable.
Financial planners can also help clients explore other options, including taking out smaller policies that provide less coverage, enabling clients to partly mitigate their risk by receiving some protection through insurance and self-funding the remaining risk of damage from natural disasters.
The terms of personal insurance policies can be difficult to decipher for those who do not have extensive experience reading them, and a financial planner can help ensure clients are fully covered for major natural disasters or have made an informed decision to partially or fully self-insure this risk. Insurance is part of a well-balanced financial plan, and the risk of natural disasters, while unlikely over the short-term, should be carefully considered.
Don’t wait until something happens. Contact PAX (San Antonio) Financial Group to see how we can help.
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