How $250,000 Went Up in Smoke

Mary’s husband Joe, passed away several years ago but she continued to live in the home where they had raised their family.  Mary was now struggling with the effects of dementia.  But she wouldn’t hear of it when her children talked about moving her to a safer environment.  So they arranged for a home aide to provide some assistance.  However, Mary had no other assets from which to pay for care so her children chipped in.  Nevertheless, Mary was home alone for long periods of time.  And that’s when tragedy struck. 

 Mary was using the stove and, although no one is really sure how it happened, the fire originated in the kitchen.  The home was destroyed.  Miraculously, Mary escaped serious injury.  The family considered themselves lucky.  They now knew, almost too late, that Mom needed more supervision.  They planned to take the homeowners insurance money and use it to place her in an assisted living facility.  That’s when Mary’s family got a second shock. 

 You see, Mary had never increased the insurance limits on her home.  As its value increased, along with the costs of material and labor to rebuild, her policy limits remained unchanged.  So, all she received from the insurance company was $100,000, even though the fair market value of the now destroyed home was over $500,000.

When Mary sells the now vacant lot, she’ll get a bit more cash to help pay her long term care needs, but it won’t be anywhere near $400,000.  The end result is that Mary lost at least a quarter of a million dollars in that fire along with the rest of her belongings.  There is now a greater chance that she’ll run out of money.  So, while Mary and her family were lucky that she escaped the fire with her health intact she wasn’t so lucky when it comes to her finances.  She now is much worse off than her family could have ever imagined.

There are a couple of lessons to be learned here.  First, make sure you check your insurance coverages and keep them up to date.  But, the broader lesson to be taken from this tragedy is that a failure to act can have catastrophic consequences far worse than the decisions you are trying to avoid making.  As the saying goes, “a failure to plan is a plan for failure”.