Protecting the life and health of you and your family will be your top priority if a disaster hits. Luckily there are steps you can take now to prepare.
If you or a family member are injured in a disaster, coverage such as medical insurance, disability policies and long-term care suddenly could become your most important assets. But do you know what your plans cover — or what to do if you don’t have coverage? Here are the things you need to know:
- What’s covered. Find out what your plan will cover and what your out-of-pocket costs might be if you are seriously injured in a disaster. Make sure you factor this "worst-case" medical expense scenario into your emergency fund.
- Understand the process. Learn what procedures the insurance company requires you to follow in the event of an emergency. For example, can you go to any hospital, or must you be treated at a certain hospital to receive full payment? How quickly do you need to notify the insurance company that you received emergency care?
If you’re injured in a disaster and can’t go back to work for a few months — or years — how will you and your family manage financially? Disability insurance, which pays a monthly income to disabled individuals who qualify, is basically your paycheck insurance. Here's what you should know:
- Know your current policy. If you have a full-time job, chances are your employer provides you some coverage for disability, so get to know this one first. Obtain a policy description and read the clauses, as they will define how much and how long you get paid for a number of benefits, including a partial disability. Group coverage is not always the best coverage, which is what you'll have through work, so you may need to consider additional coverage through an individual policy.
- Buy an individual disability policy. A policy you buy on your own may be more expensive than group coverage, and you will have to qualify. For example, if you engage in high-risk activities such as skydiving, you may not be able to buy disability insurance. But, it also may provide better benefits than an employer’s plan. Generally, disability coverage is limited to 60-70% of your gross income, so try to get as much coverage as you can for as long as possible. Look for an “own occupation” definition of disability, which means you will receive benefits if you are disabled and cannot work in your original job, even if you can work doing something else. Shop for a plan that provides a benefit for a partial or residual disability, meaning that you’re able to work but not at full capacity. Look for a noncancelable, guaranteed renewable policy with a cost-of-living adjustment.
- Understand the income tax implications. In general, if you pay the premiums for a disability policy, the benefits are tax free. If an employer pays the premiums, the benefits will be taxable income to you. Credit card disability benefits are generally nontaxable income.
- Know what you qualify for. If you are totally disabled by a disaster or any other cause, you might qualify for Social Security benefits. (To learn more, go to ssa.gov.) If you’re injured on the job during a disaster, workers’ compensation might apply, and if you’re a veteran, you could be eligible for veterans’ disability benefits. These types of benefits, however, may take months or years to obtain.
If you lost your life during a disaster, would your loved ones be able to manage financially? Having adequate life insurance could mean the difference between their financial security and financial catastrophe. To determine the type and amount of life insurance you need, work with a qualified financial planner or insurance agent. It’s also important to check beneficiaries to ensure that those currently named are correct. Naming of contingent beneficiaries is often overlooked.
Before buying any type of insurance, always check the financial stability of the company. Independent rating services, such as A.M. Best Company (ambest.com), Duff & Phelps (duffandphelps.com), Moody’s Investors Service (moodys.com), Standard & Poor’s (standardandpoors.com) and Weiss Ratings Inc. (weissratings.com) can provide this information. You also can check the complaints against an insurance company on some state insurance department websites.
Here's what you need to know to make sure you have adequate coverage, keeping in mind that your needs will change as your family, work and other life circumstances change.
- Review your needs. Start with our life insurance calculator to help determine how much coverage you need. Factors include things like how many dependents you have, their ages and needs, your debts and the ability of your spouse to earn a living.
- Consult your CPA. They can help you determine the amount of insurance that best suits your needs and understand the different options available.
- Reevaluate your coverage. Review your coverage whenever there is a change in your life, like marriage, divorce or birth of a child. It's also a good time to make sure that the individuals you named as beneficiaries are still correct.
- Understand different types of insurance. Term insurance provides coverage for a specified length of time, such as 10 or 20 years, and pays benefits only in the event of death. Cash-value insurance, which includes whole life, variable life and universal life, may be a better buy for long-term needs. Find out if you can collect all or part of the policy’s face value before death if you become terminally ill. Some policies allow for term insurance to be converted to permanent insurance in the case of a permanent disability, which would allow you to continue to build a nest egg even though you are disabled.
For more information, check out our full guide, Disasters and Financial Planning: A Guide for Preparedness and Recovery, created in collaboration with the American Red Cross as a public service by the National Endowment for Financial Education (NEFE).