How Homeowners Could Benefit from a Catastrophe Savings Account
Over the past few years, there has been a rise in property losses caused by national disasters. While homeowners insurance is equipped to cover most of these types of losses, there are times that a homeowner may have to pay out-of-pocket for uninsured costs. A few states are creating solutions to this dilemma with the creation of the catastrophe savings account.
What is a Catastrophe Savings Account?
A catastrophe savings account is an account that allows a person to set money aside, income tax-free, to pay for catastrophic expenses. These accounts are state-based and come with a number of guidelines, including dollar limitations. Also, they can only be used for expenses toward catastrophic events that are deemed qualified.
Catastrophe accounts are different than catastrophe insurance. While catastrophe insurance is purchased to cover damage caused by earthquakes, floods and other naturally-occurring disasters, similar to home or flood insurance, the catastrophe savings account allows homeowners to set aside money for the out-of-pocket expenses that insurance doesn’t cover.
For many homeowners, these accounts make the difference in being able to pay their deductible or other costs associated with damage losses. This savings account earns interest as well, so these accounts allow homeowners to save and grow their money without worries of paying state income taxes.
Alabama Senate Approves Catastrophe Accounts
Recently, the Alabama Senate gave final passage to a package of four bills that were aimed at helping control the rising cost of Alabama homeowners insurance. One of the pieces of the package was a catastrophe savings account.
Under guidelines set up by the state, this account will serve as interest-bearing regular savings accounts or money market accounts established by an insurance policyholder — or a person who is self-insured — who is a state income taxpayer for residential property in the state.
The account will only be allowed for reimbursements of an insurance deductible, or other uninsured portions of risk of loss for residential property.
Other guidelines of the accounts include:
- Accountholders can contribute a maximum of $2,000 if the qualified deductible is less than or equal to $1,000.
- Accountholders can contribute up to $15,000 if the qualified deductible is greater than $1,000.
- Self-insured homeowners can contribute up to $250,000 as long as their contributions don’t exceed their home values.
- The account must be labeled as a catastrophe savings account to qualify under the act.
- A taxpayer may establish only one catastrophe savings account.
- The accountholder must specify that the purpose of the account is to cover the amount of insurance deductibles and other uninsured portions of risks of loss catastrophic events.
Homeowners who open an account will be able to claim a credit against their state income tax for deposits made. Incidents that qualify for reimbursement include hurricane, rising floodwaters, or other catastrophic windstorm event damage, including tornadoes, high winds and hail.
Can I Create My Own Catastrophe Savings Account?
Alabama’s decision to offer a catastrophe savings account is a unique one. While it and South Carolina offer these savings options, it’s hard to find any other tax-adjusted account related to uninsured costs, except for the health savings account.
Someone looking for ways to save their money for an emergency should consider the following options:
- High-interest savings accounts: High-interest savings accounts allow homeowners to set aside a portion of their money to grow interest. Before considering this type of account, however, note that it normally requires a minimum daily balance and only allows for a specified number of withdrawals, which could make it difficult to gain access to funds when needed.
- Money market accounts: Money market accounts serve as a blend of the high-interest savings account and checking account in that they allow you to make deposits and earn interest on that money, while giving you liquid access to your funds via checks. As with high-interest savings accounts, it’s smart to proceed with caution as you may still have to keep a minimum balance.
The Catastrophe Savings Accounts Act of 2011 was introduced as a way to help homeowners pay for uninsured costs associated with national disasters. It followed similar guidelines as the law passed in the Alabama Senate, but to date has not advanced in Congress.
With the costs of natural disasters rising, homeowners need alternate ways to cover the cost of deductibles and other damage costs. While there are currently no national catastrophe savings account options available, homeowners can take creative routes to cover lacking homeowners insurance expenses.