Ways to Rebuild After a Disaster Your Insurance Doesn't Cover

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When several major hurricanes made landfall in the United States in the fall of 2017, billions of dollars in property damage occurred. Much of the damage involved flooding of private homes -- a significant percentage of which were not in flood zones and did not have flood insurance coverage. 

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Unfortunately, while most people believe their homeowners' insurance will provide comprehensive coverage, this is not always the case. Earthquakes, sinkholes, and flooding are among the calamities that can destroy your home that aren't typically covered by a standard homeowner's policy.

If you experience any of these disasters and discover too late -- after the damage is done -- that you aren't covered by insurance, you'll need to explore other ways to pay to rebuild. Here are a few suggestions to help. 

FEMA grants

FEMA grants are available on a limited basis to pay for emergency housing and to pay for repairs not covered by insurance policies. While FEMA provides housing assistance to anyone affected by a disaster, regardless of income, any assistance for loss to personal property and any moving expenses will be provided on a case-by-case basis. FEMA also makes clear that while some grants are available to pay for property repairs, it does not provide grants to restore your home to its pre-disaster condition. 

If you become eligible for a grant, the money does not have to be repaid. You can contact FEMA at 800-621-3362, visit Disaster Assistance.gov to apply online, or visit a local Disaster Recovery Center to find out about the process of applying for FEMA grants. Generally, to be eligible for a grant from FEMA, you must apply for a disaster loan first. 

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Low-interest government loans

Disaster loans provided by the Small Business Administration (SBA) are a primary source of funding for rebuilding after a disaster. SBA loans can be provided to restore your home in full, unlike FEMA grants. These loans must be paid back, however, unlike a grant.

Only individuals in designated disaster areas are eligible for this specific type of low-interest SBA loan, and the loans must be used for allowable purposes, including repair or replacement of real property, equipment and machinery, fixtures, inventory, and leasehold improvements .

Businesses may borrow a maximum of $2 million to cover physical damage, while certain small businesses and non-profits can also obtain loans up to $2 million for economic injury. Homeowners are eligible to borrow up to $200,000 to repair or replace a primary residence damaged in a disaster, as well as $40,000 loans for personal property that sustained damage. 

The SBA does check your credit, and it conducts an inspection to verify disaster-related damages actually occurred. Interest rates on SBA disaster loans cannot exceed 4% if the applicant has no credit available elsewhere, and cannot exceed 8% for applicants who have access to other sources of credit. Interest rates are fixed for the life of the loan, which is a maximum of 30 years, or a maximum of three years for businesses with credit available elsewhere. The loan term and payment amount are set based on the ability of a borrower to pay. Funds are disbursed quickly, typically within five days of the time the loan closing documents have been received. 

When the SBA lends money after a disaster, the borrower can increase the amount borrowed up to 20% of the total amount of disaster damage and can use the extra money to put protections in place against similar future disasters. Loan funds are available only to cover costs of repairing uninsured physical damage. However, if you have insurance on your property but are required to use insurance proceeds to repay an outstanding mortgage, you can also obtain an SBA loan for the amount of the insurance payout used for repayment of mortgage loans.

Borrowing from a 401(k) 

A final option, and a last resort, is to tap into your retirement savings to get the funds to rebuild. After some disasters, the IRS issues special guidance suspending the usual rules in place for hardship withdrawals or loans. The IRS allows for loans or withdrawals even if plan language wouldn't normally permit this, without the need for plan language to first be formally amended.  In other words, if a workplace retirement plan doesn't have provisions authorizing employees to take money out to cover hurricane losses, affected employees can still move forward with withdrawals without having to wait for the plan terms to be changed first . 

Tax penalties remain in effect for early withdrawals for hardship, even if you take the money out of a retirement account to cover costs after a hurricane.  Because of this, a loan may be better than an outright withdrawal.  However, borrowing from your retirement comes with substantial risks and downsides, so either taking a loan or making withdrawals should be considered as an absolute last resort only after exploring all other options to obtain funds to rebuild after a disaster. 

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