Disaster Risks Rise as Insurers Crimp Coverage

Since September 11, 2001, disasters (both man-made and natural) have become more frequent and more costly. The National Oceanic and Atmospheric Administration and U.S. Geological Survey report a significant increase over the last decade in the number of natural disasters that cause $1 billion or more in damages. These include hurricanes, earthquakes, tornados, wildfires, etc.

How vulnerable to a potential catastrophic loss are you? Much of your risk exposure will depend on where you live. But every region is vulnerable to some type of natural disaster.

Beware: Your Homeowners Policy Probably Does Not Fully Protect You

The right kinds of insurance can help you recover your losses. Unfortunately, insurance costs are rising as insurers perceive greater risk exposure. Certain types of coverage are becoming harder to get. For example, some insurers are now limiting what they will cover in the event of an electromagnetic pulse event. Or refusing coverage for EMP-related damage altogether.

Insurance companies are raising rates and trimming coverage for disasters such as hurricanes in higher-risk areas. In some cases insurers are eliminating certain types of policies altogether. In southern Louisiana, for example, State Farm has ceased selling homeowners policies that cover damage from wind and hail.

Most people rely on homeowners (or renters) insurance to cover their most valuable assets. A typical homeowners policy still leaves you vulnerable to many types of threats. The reality is that most standard homeowners and renters policies have holes in them that can leave you high and dry after a disaster.

Unless you have special riders or separate policies, the following situations may not be covered:

Earthquakes. Earthquake coverage is usually available as a separate add-on at extra cost.
Flooding. If you live in a designated high-risk flood area or want flood insurance, you generally must get it through FEMA’s National Flood Insurance Program.
Burst pipes. Your insurer could attribute them to your negligence (e.g., failing to protect them from frigid temperatures) and refuse to cover damages.
Simultaneous events. If your home were to suffer damage from a falling tree and from flooding during a violent storm, the insurance company might insist that the falling tree was a result of the flood. You could therefore be on the hook for all damages.
Necessary upgrades. Even a guaranteed replacement cost policy may not cover costs associated with bringing a home up to more stringent building code standards.

Complete rebuilds. In the event of a total loss, a homeowners policy based on the fair value ofrebuilding what you had. For that, you should opt for guaranteed replacement cost coverage.
Lost wages. If a disaster and its aftermath prevents you from working, you’re out of luck.

Deducting Disaster Expenses

Casualty losses not covered by insurance can potentially be claimed as tax write-offs. According to the Internal Revenue Service, a casualty loss occurs when “damage, destruction, or loss of your property” results from “any sudden, unexpected or unusual event such as a flood, hurricane, tornado, fire, earthquake or volcanic eruption.”

Unfortunately, the rules for claiming financial losses suffered during a disaster aren’t simple and straightforward. Some are quite strange. The main impediments to claiming deductions are the $100 rule and the 10% rule.

The IRS explains by way of this eloquent and highly refined bureaucratic verbiage: “For property held by you for your personal use, you must subtract $100 from each casualty or theft event that occurred during the year after you have subtracted any salvage value and any insurance or other reimbursement. Then add up all those amounts and subtract 10% of your adjusted gross income from that total…”

The figure you end up with is the amount of your allowable write-off. Or, if you prefer, you can have your accountant do the calculations.

There is one loophole you may be able to take advantage of if you live in a federally declared disaster area. You can deduct your losses in the tax year they occurred, like ordinary casualty deductions. Or, in the special case of federal disaster areas, you can deduct them for the preceding year. That will give you a more immediate tax benefit.

Long-Term Care Insurance Woes

Coverage for personal disasters such as disability and long-term care is also getting harder (and more expensive) to come by. Several leading providers of long-term care insurance have recently exited the market, citing unexpectedly high costs of benefit claims and longer stays at nursing homes.

It seems the entire industry failed at long-term cost projections. Only about a dozen insurance companies continue to offer long-term care, down from a peak of over 100. Those that do remain are jacking up premiums and reducing benefits. Some elderly retirees are seeing premium increases of 50% to 90% on policies they bought years ago. Despite an assumption that premiums and benefits would remain stable.

If you’re in the market for a new long-term care policy, you might want to think twice about whether it’s really worth it. These policies aren’t what they used to be. Moreover, the financial strength of some of the remaining providers is in doubt, as is their ability/willingness to actually pay future claims.

As an alternative to long-term care insurance, consider setting up a trust, a whole life insurance policy, or a separate account through which you can build up emergency savings over time. With long-term care insurance, you have no built-up cash value. If you don’t claim benefits, all the premiums you paid are pocketed by the insurance company.

Insurance vs. Cash

You never know when a personal emergency may require a significant expenditure. Long-term care insurance only covers costs related to long-term care (such as a stay at a nursing home).

You may never need long-term care services. But you may require some other form of professional assistance or need to incur a major material expense (such as a home renovation) that isn’t covered by a long-term care policy.

For these reasons, building up an emergency fund for old-age can be a better use of the funds you’d otherwise pay in premiums for long-term care coverage.