- Author: Patti C. Wooten Swanson
Small Step: Evaluate your homeowners insurance coverage.
If natural disaster destroyed your home, would your homeowners insurance policy pay enough to rebuild the house?
The recent fires and floods across the country started me thinking about my own financial preparation and ability to recover from a natural disaster. Like most Americans, my home is my largest financial asset and the cornerstone of my retirement plans.
It's makes financial sense to be sure my homeowners insurance policy will protect my investment if there is a natural disaster.
Three Questions to Ask About Your Homeowners Policy:
Policies generally cover either the “actual value” or the “replacement value” of a home. The names sound similar, but there can be a big difference in the coverage.
An “actual value" policy pays to rebuild the house based on its depreciated value. If you have an older home, the policy may pay considerably less than what it what it would cost to rebuild today using new materials.
For example, my house (built in the 1950s) has a 20 year old roof. If a fire destroyed the house an "actual value" policy would pay the depreciated value of the roof, which would not be nearly enough to replace it at today's prices. The same goes for replacing older bathroom fixtures and worn kitchen floor coverings.
In contrast, a replacement value" policy would cover the full cost (less a deductible) to rebuild at current prices.
2. Do you have enough insurance coverage?
First, read your home owners policy to find out the dollar value of your coverage.
How do you know if you have enough? Get a rough estimate of what it would cost to rebuild your home by asking a local builder or contractor the cost per square foot for new construction (labor and materials) and multiply the cost by the total square footage of your house.
Don't base the amount of insurance on the market value of your home. If you do, you'll buy more insurance than you need, since that price includes the value of the land your home is on. Most likely, the land will still be useable after a natural disaster, so you only need to insure the structure.
Be sure to update the policy value if you do a substantial renovation or make an addition to the house.
3. Does the policy cover the disasters you are likely to face?
Review the policy document to find out. Standard homeowner policies, known as HO-3 policies, cover specified disasters or "perils" which are listed in the written policy: fire, lightning, tornadoes, wind storms, hail, explosions, smoke, vandalism and theft. Most do NOT cover damage caused by floods and earthquakes.
Visit FEMA's National Flood Insurance Program (NFIP) website to learn more. If you live in a moderate-to-low risk area and are eligible for the Preferred Risk Policy (low cost), your flood insurance premium could be as low as $129 a year.
If you live in a flood prone area, contact your insurance agent or go to your State Insurance Commission's website to find out about costs and purchasing flood insurance.
You can buy a supplemental policy that covers earthquakes from an insurance agent. Californians may contact the California Earthquake Authority (CEA), a publicly managed organization that provides catastrophic residential earthquake insurance.
Financial Planning Tip: Homeowners insurance is an important part of a financial plan. Plan to be covered!
- Author: Patti C. Wooten Swanson
If you've been following the dramatic up's and down's of the stock market in recent weeks you may be worried (almost everyone I know is!)
What should you do now? Get out of the stock market altogether? Hang on? Or, buy more stock while it is "on sale" as a result of recent declines.
Since I'm not a qualified investment advisor, let me pass on 3 time-honored recommendations from someone who is: Jill Schlesinger, of CBS Money Watch.
1. Don't make any rash decisions.
When the market tanks, some investors hurry to unload their stock (including stock invested in their retirement plans) and their “paper losses” turn into actual losses. But, is that that a good idea?
Cooperative Extension financial specialists advise investors not to react to daily investment performance indicators. Instead, they emphasize the importance of keeping the long-term view on your investments and recommend not selling a stock (or in this case divesting the investment from your retirement account) unless it has underperformed the market for a least a year.
Financial advisor, Steve Vernon says the best approach is to "do nothing at all”. As evidence he cites a recent report from Fidelity Investments about the actions and investment outcomes of retirement plan participants since the 2008-2009 downturn:
Analysts discovered that retirement plan participants who maintained a balanced portfolio (that included stock) for the entire period (from the fourth quarter of 2008 through the second quarter of 2011) realized earning of 50% or more. But, participants who changed their stock allocations to zero percent between Oct. 1, 2008, and Mar. 31, 2009 and maintained this allocation through June 30, 2011, experienced an average of 2% growth in their accounts.
2. Maintain a diversified, balanced portfolio.
According to experts, asset allocation accounts for 90% of earnings on an investment portfolio. (Portfolio” refers to the collection of investments, including cash, CDs, stocks, and more that someone owns.)
When the market is volatile---values are going down (or up) rapidly---maintaining a diverse portfolio means you don't put all your eggs in one basket. Instead, continue investing in different classes of assets (stocks, bonds, cash or real estate) and choose different funds within classes (such as domestic stocks, international stocks, corporate bonds and municipal bonds, etc.) and different industries (such as high tech, health care, and agriculture).
If one asset class or fund loses value, you still have other others and don't lose your entire investment.
3. Stick to you "game plan"---it may be a good time to rebalance your asset allocation.
Your "game plan' refers to your asset allocation. If you have chosen a diversified, balanced portfolio based on your long-term goals and risk tolerance, then short-term changes in the stock market shouldn't affect your plan.
If the downturn makes you realize that your current asset allocation is too risky, one possible strategy is to leave the portfolio as it is and put any new saving retirement savings in less aggressive investments.
Over time major changes in the stock market can change the actual make-up of your portfolio. For example, if stocks go down in value, then they make up a smaller percentage of the total portfolio. If you believe your original allocation was appropriate, then major changes in the stock market could indicate it's time to rebalance your holdings.
Tip: Before selling or buying, consult a financial advisor since there may be fees or other factors to consider. Some investment companies will rebalance an account for you.
So what should an investor do at times like this?
Do as the British government exhorted its citizens at the beginning of World War II: Keep calm and carry on.”