How To Protect Yourself From The Financial Impact Of Natural Disasters

When I lived in San Francisco, California, I became accustomed to a wildfire season. During that time, I knew that the air quality would be poor, air purifiers would sell out everywhere, and the sky may turn orange for days on end, with one terrible fire often happening around late October or early November.

Friends and their families had houses burn to the ground regularly and many people who lived in the hills lost homeowner’s insurance coverage for fire damage because the financial risk was too great for the insurance companies to bear.

The United States Geological Survey warns that as global warming progresses, natural disasters will increase in frequency and severity. This is how these natural disasters across the United States affect your wallet and some ways to lessen the burden.

Direct Financial Costs

It’s no secret that the economic impact of natural disasters is immense. The National Oceanic and Atmospheric Administration estimated the financial cost of the 28 natural disasters that occurred in 2023 totaled $92.9 billion.

Even with insurance coverage, natural disasters like earthquakes, hurricanes, fires, and tornadoes can result in significant cost to the individuals and businesses affected by them. Many insurance policies also specifically exclude things like earth movement and flooding from policy coverage, forcing individuals to cover damages out of pocket.

If you own a home near where a disaster happened but your home was unaffected by the event, you may still have to contend with skyrocketing homeowners’ insurance premiums or policy exclusions that put you at risk.

Real Estate Impact

For some people, their homes are their main asset. According to Pew Research Center, a home is typically a homeowner’s the highest valued asset. It may be their shelter, emergency reserve, and retirement plan all wrapped into one location. But what happens to the value when your home shows itself to be susceptible to natural disasters, and therefore both a financial and safety risk? The property value goes down. For the people who do have their home as their main asset, this can be a devastating blow.

Securing a mortgage or home equity line also can become increasingly difficult because lenders do not want to take on the financial risk either. Investors needing loans in these areas may find themselves paying an interest rate higher than the market rate or they may not even be able to qualify for a mortgage. Additionally, for some lenders, if you don’t have sufficient homeowner’s insurance, they reserve the right to repossess your home.

Strategies To Protect Yourself

Emergency Reserves

First and foremost, all investors should have emergency reserves regardless of whether they own a home. The appropriate dollar amount of reserves should usually be calculated based off monthly expenses. For most people, three to six months of fixed expenses should be sufficient.

However, if you are having difficulty acquiring sufficient insurance coverage for the types of disasters that could affect your home, you may want to consider increasing the amount of money you hold in reserve. It may be appropriate to keep more than six months of expenses in reserve to self-insure some of the added risk.

Let’s say your home is susceptible to wildfires and your insurance company opts not to offer you fire coverage in the future. If your regular expenses are only $2,000 per month, most guidance would suggest you need a maximum of $12,000 in reserve. However, if your house burned down, $12,000 may not go very far toward home repairs.

Diversify

Your home should not be your entire investment strategy. You should have other investments to fall back on beyond those emergency reserves. Even saving a small amount per month can make a big difference in the long run.

You should also ensure that your investment portfolios are sufficiently diversified because natural disasters can affect financial markets. For example, let’s say you hold a disproportionate amount of stock in one oil company and that company has a costly oil spill as the result of a tsunami, your portfolio value could reduce significantly or even go to $0.

The reach of natural disasters could span across multiple industries and create financial stress on many companies, but there will always be some industries left unaffected. Having a broadly diversified portfolio can take a lot of this financial risk off the table.

Programs That Can Support You

Federal and state governments usually understand that people need significant financial support after a disaster strikes. Programs through organizations like the Federal Emergency Management Agency were created to provide some relief.

Local, community-led initiatives can also support those affected by natural disasters.

Conclusion

Natural disasters can pose a significant financial threat to individual investors, affecting property values, insurance costs, and personal finances. Proactive financial planning, including investment diversification and maintaining emergency funds, is essential to mitigate these risks. Additionally, leveraging government and community support can provide crucial assistance in times of need. As the frequency and severity of natural disasters increase due to global warming, staying informed and prepared is more important than ever.

This informational and educational article does not offer or constitute, and should not be relied upon as, tax or financial advice. Your unique needs, goals and circumstances require the individualized attention of your own tax and financial professionals whose advice and services will prevail over any information provided in this article. Equitable Advisors, LLC and its associates and affiliates do not provide tax or legal advice or services. Equitable Advisors, LLC (Equitable Financial Advisors in MI and TN) and its affiliates do not endorse, approve or make any representations as to the accuracy, completeness or appropriateness of any part of any content linked to from this article.

Cicely Jones (CA Insurance Lic. #: 0K81625) offers securities through Equitable Advisors, LLC (NY, NY 212-314-4600), member FINRA, SIPC (Equitable Financial Advisors in MI & TN) and offers annuity and insurance products through Equitable Network, LLC, which conducts business in California as Equitable Network Insurance Agency of California, LLC). Financial Professionals may transact business and/or respond to inquiries only in state(s) in which they are properly qualified. Any compensation that Ms. Jones may receive for the publication of this article is earned separate from, and entirely outside of her capacities with, Equitable Advisors, LLC and Equitable Network, LLC (Equitable Network Insurance Agency of California, LLC). AGE-7224725.1 (10/24)(exp. 10/28)