Hurricane season is here! Did you meet Elsa?
Just as you prepare for the hurricane season, you should make sure you are prepared for any financial storms as well.
First, you may need emergency cash. We all keep an amount in our checking accounts to cover the monthly bills. Then we may keep some extra cash in a savings account which may be invested in CDs. But what if you have an emergency and need a significant sum of money for a new roof, medical emergency, or something else?
We recommend an emergency fund that is equal to three to six months of monthly expenditures. These are the funds that you might need unexpectedly and quickly. The best amount is whatever makes you feel comfortable and prepared. These funds should be invested in assets that are fairly liquid such as CDs with staggered maturity dates, or a money market fund.
There are other risks that you need to be prepared for such as property damage from a storm or other natural disaster. When it comes time to submit your insurance claim, you may need some proof of your loss. We suggest video recording the interior and exterior of your residence to document the contents for insurance purposes. The amount of damage could be catastrophic, especially if you were to lose your roof to a storm or lose your home to fire. Be prepared, and safeguard important documents.
You will also need sufficient funds to pay the deductible amount of your property insurance policy. This is where your emergency fund can come in handy. It is also important to make sure you have sufficient coverage and a property insurance policy that has replacement cost coverage. To keep your premiums affordable, you can always insure 80-90% of the replacement cost and increase your deductibles. But, be aware of the risk; windstorm damage to your property that occurs when a hurricane is located anywhere in the State of Florida, and up to 72 hours afterward, is subject to a special “hurricane” deductible. This deductible is most often based on a percentage of your coverage limit, usually between 2% – 10%. So, if your home is insured for $400,000 and you have a 10% hurricane deductible, you are responsible for the first $40,000 of hurricane damage. Ouch!
Unrelated to the storm, you need to be prepared for the other unforeseen eventualities in life. Life insurance provides a level of protection when an unexpected death occurs. It can come in handy covering monthly payments that can’t be deferred such as a mortgage payment, as well as final expenses.
Auto insurance is something you are required to have if you have financed your vehicle, and all Florida drivers are required to have a limited amount of coverage. Frequently, people add an umbrella policy that provides the extra protection you might need in the event of a liability claim that exceeds the liability insurance limit of your auto insurance and homeowner’s policies. Normally you can find a $1 million policy that is reasonably priced. Besides having liability protection, the insurance company will represent you and “fight” for you in case a frivolous claim is presented.
As we age, our medical costs can increase. It is important to maintain adequate health insurance coverage to protect you from unexpected medical costs. Balancing the amount of coverage with the premiums and out-of-pocket costs is a decision you should make taking into consideration your health, financial situation, and family history. And in the event you change jobs, you should plan carefully to avoid a gap in coverage before your new employer’s policy takes effect.
Another occurrence that can devastate your financial wellbeing is if you or an immediate family member becomes incapacitated and requires long-term care. Long-term care insurance premiums are high and increase as you age. It is difficult to gauge the likelihood that you will need the coverage, but your current health and family history can help you make an informed decision. Many people decide to “self-insure” their long-term care. That means you will fund your long-term care costs as you go. Depending on your assets, this may be a reasonable option to cover your long-term care costs.
Protecting yourself and your family from financial risks is an important part of comprehensive financial planning. Contact your trusted financial advisor to learn more.
Robert M. Eckenroth | CPA, MBA