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New Guide Offers Tips on Financial Planning for Disasters

Aug 10th 2015
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Natural disasters strike anywhere and anytime, and can take many forms. While most people are aware of emergency supplies to have on hand and where to seek shelter, financial planning for such events doesn't always get the attention it should.

In a joint effort, the American Red Cross, American Institute of CPAs (AICPA), and the National Endowment for Financial Education recently released a new guide, Disasters and Financial Planning: A Guide for Preparedness and Recovery, that serves as a one-stop source of information.

Here are the highlights of what advisors and their clients should know.

Property insurance. Make sure you know exactly what your insurance does and doesn't cover. Does it include replacement coverage, and if so, what kind? Are upgrades you may have to make if the building isn't up to current codes covered? Consider additional insurance for calamities, such as earthquakes and floods, and riders for special belongings, such as office equipment and artwork. If assets are owned by a trust or limited liability company, are those entities covered as a primary or additional party? And don't forget vehicle insurance. Keep policies, policy numbers, and insurers' phone numbers in a safe place.

Mitigation. Preparing your property for a disaster ranges from the very simple to complex – and can cost accordingly. Installing latches on cabinet doors to keep them shut is cheap, while a safe room or special foundation anchoring costs thousands. If ready cash isn't available, bank and credit loans are possible. Borrowing against home equity, retirement plans, and life-insurance policies are possibilities, but there will be tax consequences that warrant the expertise of a financial advisor. Check with state and federal agencies about financial assistance programs. If contractors do the work, be sure to check licenses and insurance, permitting requirements by local governments, and get a release of lien that protects you if the general contractor fails to pay the subcontractors.

Health and life insurance. Know what's covered and for how long – and if benefits apply only if certain providers are used. Make sure the policies are in effect. Consider disability policies, and ensure they cover cost-of-living adjustments and can't be canceled. Also, make sure you understand their income tax implications. Evaluate your life-insurance coverage; life changes, such as divorce or the birth of a child, warrant updates.

Taxes. Tax issues are mentioned in several sections in the guide, but the AICPA offers this brief snapshot: Be aware that casualty-loss rules are complicated and warrant the services of a financial advisor. Losses generally are deductible if they total more than $100 in one year and more than 10 percent of adjusted gross income. Document a loss and its cost, and know that special loss rules pertain in federally declared disaster areas.

Estate planning. The importance of estate planning in connection with natural disasters should go without saying. But we'll say it anyway: The possibility of serious injury or death during such an event makes estate planning crucial. A will or living trust, power of attorney, healthcare proxy, living will, special-needs trusts, and beneficiary designations should all be considered.

Protecting records. Store originals of vital documents (passports, deeds, and birth certificates) in a bank safe deposit box – but not a will because courts will temporarily seal a safe deposit box upon the holder's death. Instead, let your attorney or someone you trust hold the will. Keep duplicates of these documents in another location or in the cloud. Make a disaster supplies kit, and keep important papers, account numbers and access codes, and contact information there. In the event of a disaster, make sure damage is documented. Take photos and video, and protect them. Make a household inventory that includes values of vehicles, buildings, and belongings.

Recovery. Proper planning – everything listed above and even more that is detailed in the guide – makes recovery ever so much easier. Having the correct and properly prepared documents, policy numbers, names, and phone numbers will go far in smoothing repairs in the aftermath of a disaster. Save receipts and statements for all living expenses and repairs, and make only “reasonable and necessary” repairs. Why? Because a claims adjuster will assess the damages and what repairs must be made. Some insurers want independent assessments from public adjusters. Make sure you know your employer's workplace and benefits options, and call the boss as soon as possible.


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