Planning for catastrophe - money management

Black Enterprise, May, 1993 by Patricia Carey

Last spring-on April Fool's day to be exact--Melinda Sledge Rogers was cooking dinner when faulty wiring ignited a blaze on the second floor of her family's East Orange, N.J., home. Alerted by an indoor alarm, Rogers and daughter, Malena, 11, fled the house. By the time husband Charles, production director for BLACK ENTERPRISE magazine, raced home from his New York City office, the flames were out. Luckily, firefighters managed to save most of the main structure. Still, damages to the three-bedroom Colonial totaled a searing 110,000.

The fire was traumatizing for the Rogers family, who rented an apartment during the eight months it took to renovate their home. Yet the incident was not a financial wipeout--thanks to the couple's comprehensive homeowner's insurance. "When I bought the policy, I told the agent, "Cover everything," recalls Charles Rogers, who purchased the house w his wife back in 1988. "I didn't want to worry abc anything."

An unexpected catastrophe can turn your life--and your finances--upside down. Consider just a few possibilities: You or your spouse suffers a disabling injury and can no longer work. A visitor to your home trips on frayed carpet and sues. Your pension plan goes bust Your bank folds. Could you cope?

Chances are, you've worked hard to build a web of savings, investments and insurance--a financial safety net of sorts. But just how strong are the fibers? Don't wait until misfortune strikes to find out. Here's what it takes to secure your finances and survive a potential disaster.

Insure Your Home Like A Fortress

It may have been fate that sparked the fire in the Rogers' home. It was careful planning, however, that shielded the young family from financial ruin. Unfortunately, not everyone is so well prepared.

Too often, homeowners shopping for insurance focus on a policy's premium rather than its content, says Bill Anderson, vice president of education and technical affairs for the Independent Insurance Agents of America in Alexandria, Va. "The only time people get really interested is at the time of a loss," he says. "And that's way too late."

A standard homeowners policy should cover losses and expenses related to fire, theft and similar mishaps. For starters, shop for one that covers the "replacement value" of your home and its contents rather than its "cash value." Replacement value insurance will tack on as much as 15% to your premium, but it's worth it: Cash value pays back only the depreciated cost of destroyed items--which won't be enough to replace them.

In addition, you'll want to select a policy that specifies "guaranteed replacement costs," adds Anderson. This ensures that you'll get reimbursed for the actual amount it costs to rebuild your house--not just its market value. Such coverage is key in wide-scale natural disasters, which trigger materials shortages and high prices. After Hurricane Andrew assaulted South Florida last August, for instance, Miama-area construction costs shot up from $60 to $120 per square foot. Andrew's devastation exposed another common error: failure to insure against floods, which, like earthquakes, require supplemental insurance. "All policies cover wind damage from storms, but not floods," notes Bob Hunter, president of the National Insurance Consumer Organization, a nonprofit group in Alexandria, Va.

Government-subsidized flood insurance is available from the National Flood Insurance Program and should be purchased by anyone living in a high-risk area (contact the Federal Emergency Management Agency). The government has mapped the 100-year flood-plain around the country. To find out your risk, check the maps of your area, which are usually on file at city hall.

Keep in mind: A policy won't automatically cover everything under your roof. For example, big ticket items (such as furs, jewelry and antiques) will require an add-on or rider. And the self-employed should note that many policies limit coverage on home-office equipment.

It doesn't matter how much coverage you have on paper if your insurer is loath--or unable--to pay up. So choose an insurance company that (a) earns a high safety ranking from such rating services as A.M. Best Co. Inc. and (b) has a good record for handling claims. Your state insurance department keeps track of the complaints filed against companies doing business in your state.

How to avoid haggling with your insurer over claims? Keep an inventory of your possessions, ideally with photographs or a video. Sales receipts and appraisal papers help make your case. Store the log (along with the policy itself and the house deed) in a secure place away from home, such as your office or a safe-deposit box.

Some financial planners say that extra liability insurance--the coverage you'd need if someone were to sue you for an accident on your property--is only for the wealthy. Hunter, however, disagrees. "People think that if you're not rich, you won't get sued for $1 million," he says. "That's not true. You might get sued if they can't collect. They can take all your assets and put a lien on your salary." Since most policies carry modest liability benefits, Anderson recommends an umbrella policy that kicks in after the limits are reached on your homeowners and auto policies. Typically, such policies provide up to $1 million worth of coverage and cost $150 to $200 per year.