Most of you were probably affected by Hurricane Matthew in some way, from being inconvenienced to suffering financial losses. More likely, some combination of these things, such as we experienced, would be more accurate. Now that we are slowly putting life and property back together, I thought it might be a good time to reflect on what financial planning topics may better prepare us for the inevitable next time we are threatened.
The first topic that comes to mind is flood insurance. People whose homes are located in flood zones, and are mortgaged by an institution, are required to carry flood insurance. Not many people truly understand flood insurance and why it is critical in northeast Florida. We recommend carrying flood insurance in this area even if your home is technically not classified as being a flood zone. Face it, the hills and valleys in this area are pretty much indistinguishable. Elevation is fairly consistent, and a storm surge can affect homes in supposedly safe areas.
Water damage from floods or tidal surges is not covered by homeowner’s insurance policies. Flood insurance can make the difference when making you whole again. In the language of insurance, this is called “indemnification,” which means that you are returned to your condition as it existed prior to your loss.
Unless you are financially and emotionally prepared to “eat” a lot of the cost of your storm damage, be sure that your insurance package is complete, meaning that you carry flood insurance along with your regular homeowner’s policy. Good news – it is very reasonably priced, and there is good reason why.
Insurance is a topic that most people find boring and uninteresting, at least until they need it or are faced with potential financial loss. For insurance to work properly, meaning to offer sufficient, affordable protection against various perils, two guiding principles must be present; the Law of Large Numbers and Random Selection. Have you wondered how life insurance companies can charge you a very small sum of money, yet pay huge claims if you die? Large numbers of people pay into the system, and a few random people die. It’s just that simple.
These principles are not prevalent in the world of flood insurance. In a flooded area, there is no random selection. Floods are 100% nonselective. Water is unlike almost any other peril, in that everything in its path is affected. Water is uncompressible, making it the “irresistible force” in the old saying that includes the “unmovable object.” Something has to give, so it does. And it’s not the flood water that loses.
In the early days of flood insurance, private carriers offered coverage to individuals, who mostly didn’t buy it, but should have done so. Congress made the right move in 1968, creating the national flood insurance program. Sometimes, if rarely, our government gets it exactly right. Along the way, the system developed in a manner that caused the law of large numbers to work, even in the absence of random selection. The only entity large enough to be effective with only one of those two principles of insurance prevalent is the Federal Government. In other words, the system was effective. Knowing the potential for losses that we see all around us, please consider adding flood insurance to your general coverages. Call your agent or an independent agent and get a quote. Rates and policies are very consistent, as the program is administered at the federal level.
The next topic may affect many of you without you realizing it. In a time of rising property values, which thankfully we are in once again, it is imperative to keep up with the value of your home. Insurance rules state that your coverage must be at least 80% of your home’s value if you are to get true replacement reimbursement (indemnity). If your property value rises above your policy limits by more than this 80/20 mix, your claim will only be paid on a percentage basis. Do not let that happen to you, as it could cause a catastrophic dent in your financial plans.
Other than insurance, there are aspects of financial planning that can be affected by disasters, whether threatened or real. Anyone with actual stock or bond certificates needs to protect them, or better yet, get them electronically registered. Coins, bullion, art and other collectibles must be protected and/or insured.
Cash reserves are likely to be depleted with the “extra” costs of boarding up, fleeing the area, and restoring what is damaged upon your return. Be sure there is adequate cash in your “rainy day fund.” This includes having some cash on hand for expenses during the period of inconvenience.
While we could probably go on for hours or pages, the point here is about the value of planning. We fear that The First Coast has been so fortunate for so long, and the population has grown so dramatically, that many people are too complacent. While our current experience is still fresh in our minds, let’s all get better at planning. We can help.
The good people of Northeast Florida took a beating, and especially so in the St. Augustine and Flagler areas. We will rebuild to the extent possible, but some of the damage is irreversible. At least be sure that you are prepared for the worst, as we all hope for the best. There is no better time to get organized.
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