Planning for catastrophe.

Last spring-on April Fool's day to be exact--Melinda Sledge Rogers was cooking dinner when faulty wiring ignited a blaze on the second floor of her family's East Orange, N.J., home. Alerted by an indoor alarm, Rogers and daughter, Malena, 11, fled the house. By the time husband Charles, production director for BLACK ENTERPRISE magazine, raced home from his New York City office, the flames were out. Luckily, firefighters managed to save most of the main structure. Still, damages to the three-bedroom Colonial totaled a searing 110,000.

The fire was traumatizing for the Rogers family, who rented an apartment during the eight months it took to renovate their home. Yet the incident was not a financial wipeout--thanks to the couple's comprehensive homeowner's insurance. "When I bought the policy, I told the agent, "Cover everything," recalls Charles Rogers, who purchased the house w his wife back in 1988. "I didn't want to worry abc anything."

An unexpected catastrophe can turn your life--and your finances--upside down. Consider just a few possibilities: You or your spouse suffers a disabling injury and can no longer work. A visitor to your home trips on frayed carpet and sues. Your pension plan goes bust Your bank folds. Could you cope?

Chances are, you've worked hard to build a web of savings, investments and insurance--a financial safety net of sorts. But just how strong are the fibers? Don't wait until misfortune strikes to find out. Here's what it takes to secure your finances and survive a potential disaster.

Insure Your Home Like A Fortress

It may have been fate that sparked the fire in the Rogers' home. It was careful planning, however, that shielded the young family from financial ruin. Unfortunately, not everyone is so well prepared.

Too often, homeowners shopping for insurance focus on a policy's premium rather than its content, says Bill Anderson, vice president of education and technical affairs for the Independent Insurance Agents of America in Alexandria, Va. "The only time people get really interested is at the time of a loss," he says. "And that's way too late."

A standard homeowners policy should cover losses and expenses related to fire, theft and similar mishaps. For starters, shop for one that covers the "replacement value" of your home and its contents rather than its "cash value." Replacement value insurance will tack on as much as 15% to your premium, but it's worth it: Cash value pays back only the depreciated cost of destroyed items--which won't be enough to replace them.

In addition, you'll want to select a policy that specifies "guaranteed replacement costs," adds Anderson. This ensures that you'll get reimbursed for the actual amount it costs to rebuild your house--not just its market value. Such coverage is key in wide-scale natural disasters, which trigger materials shortages and high prices. After Hurricane Andrew assaulted South Florida last August, for instance, Miama-area construction costs shot up from $60 to $120 per square foot. Andrew's devastation exposed another common error: failure to insure against floods, which, like earthquakes, require supplemental insurance. "All policies cover wind damage from storms, but not floods," notes Bob Hunter, president of the National Insurance Consumer Organization, a nonprofit group in Alexandria, Va.

Government-subsidized flood insurance is available from the National Flood Insurance Program and should be purchased by anyone living in a high-risk area (contact the Federal Emergency Management Agency). The government has mapped the 100-year flood-plain around the country. To find out your risk, check the maps of your area, which are usually on file at city hall.

Keep in mind: A policy won't automatically cover everything under your roof. For example, big ticket items (such as furs, jewelry and antiques) will require an add-on or rider. And the self-employed should note that many policies limit coverage on home-office equipment.

It doesn't matter how much coverage you have on paper if your insurer is loath--or unable--to pay up. So choose an insurance company that (a) earns a high safety ranking from such rating services as A.M. Best Co. Inc. and (b) has a good record for handling claims. Your state insurance department keeps track of the complaints filed against companies doing business in your state.

How to avoid haggling with your insurer over claims? Keep an inventory of your possessions, ideally with photographs or a video. Sales receipts and appraisal papers help make your case. Store the log (along with the policy itself and the house deed) in a secure place away from home, such as your office or a safe-deposit box.

Some financial planners say that extra liability insurance--the coverage you'd need if someone were to sue you for an accident on your property--is only for the wealthy. Hunter, however, disagrees. "People think that if you're not rich, you won't get sued for $1 million," he says. "That's not true. You might get sued if they can't collect. They can take all your assets and put a lien on your salary." Since most policies carry modest liability benefits, Anderson recommends an umbrella policy that kicks in after the limits are reached on your homeowners and auto policies. Typically, such policies provide up to $1 million worth of coverage and cost $150 to $200 per year.

Good coverage doesn't have to cost a fortune, Expect to pay between $260 and $500 per year to insure a $150,000 home. Rates will vary from carrier to carrier, but most companies offer a 10% discount if you insure your cars and house with them. Another way to cut premiums is to raise your deductible. By upping your out-of-pocket costs from $250 to $1,000, you can knock an additional $50 to $100 off your premium each year. To cover your deductible, stash equivalent funds in a savings account.

Save Your Savings

When savings & loan associations began toppling like dominos a few years ago (737 have failed since 1989), many depositors complacently assumed that their money was insured by the government's Federal Deposit insurance Corp. (FDIC)--even if their accounts exceeded the insurable limit of $10,000.

Consider these sobering statistics: In 1991, failed banks left 813 uninsured depositors in the lurch for $33.3 million. In 1992, those numbers soared to 21,000 uninsured deposits totaling more than $600 million.

The problems of the banking industry are far from over. According to Veribanc Inc., a Wakefield, Mass.-based bank-rating and research firm, over 400 of the nation's 27,000 banks, S&Ls and credit unions failed last year, and another 350 are expected to go under in 1993. To protect your savings, remember these rules: Never put deposits totaling more than $100,000 in a single bank. That's the maximum amount insured by the FDIC. Secondly, don't take for granted that your bank is federally-insured. There are three main federal insurance programs: the FDIC's Bank Insurance Fund (BIF), the FDIC'S Savings Association Insurance Fund (SAIF) and the National Credit Union Administration Share Insurance Fund (NCUSIF). If you don't see one of these three logos or a general FDIC logo displayed prominently at your bank, ask why. "If you are made to feel uncomfortable for asking, the institution may not be federally insured," warns Warren G. Heller, Veribanc's research director.

Just because your bank is federally insured, don't assume that all your accounts are covered. For example, bank money market funds are not considered deposits and therefore are not covered by federal insurance. Loans, too, can cause you financial problems if they include a "call-in" provision. The FDIC may speed up the liquidation process of a failed bank by calling in as many loans as possible. If you don't pay up, the FDIC can begin collection measures and legal action. This is a particular risk for small business owners, who can lose the credit lines that keep their businesses operating.

Keeping track of your bank's financial health isn't so daunting. Begin with your local newspaper's business page. Most papers have a banking reporter who follows local institutions. Banks and S&Ls also are required to publish an annual "statement of condition," and commercial banks and S&Ls must make an "annual disclosure statement." An accountant can help you review these documents. For an easier checkup on your bank, request a $10 "instant rating" from Veribanc (see "Additional Resources").

Protect Your Earning Power 

A catastrophic illness or accident could leave you disabled for months or even years, wreaking havoc on your finances. But despite these hard realities, few people consider long-term disability insurance. "We insure our houses and our cars, but we don't insure the most important asset we have--our ability to earn income," says Thomas Roehl, a partner with Holbrook Roehl & Sittner, a Eugene, Ore., investment and financial planning firm.

In fact, many planners say disability insurance is more important than life insurance. At age 40, for example, you're three times as likely to become disabled for at least 90 days than you are to die. And an extended hospital stay could easily eat up $1,000 a day, not to mention the other bills that would quickly mount if you were unable to work.

The price of disability insurance depends on a range of factors including age, occupation and the amount of coverage. Most individual policies cover 60% of your income, until you reach age 65. For professionals, Roehl strongly advises an "own occupation" disability plan--one that pays if you are unable to perform the job for which you are trained. By contrast, an "any occupation' policy pays only if you are unable to do work of any kind.

Look for a policy that is noncancelable and guaranteed renewable, advises Roehl. Read the fine print carefully. Does it allow for partial payments in case of partial disability? Do you have the option of expanding your coverage as your income grows? What are the exclusions? For example, few policies cover normal pregnancies, but they should cover long-term disability due to complicated pregnancies.

Roehl recently scouted the disability options for a 32-year-old physician with an annual income of $100,000. For a monthly benefit of $5,875 (about 70% of his income) to age 65 with a 90-day elimination period (the time he must be disabled before receiving benefits) the annual premium was $2,003. You can always decrease the premium by lengthening the elimination period. In the doctor's case, raising it to 180 days would save $280 a year.

Many companies offer group disability coverage--but review the terms carefully. You may still need an individual policy. Group plans frequently cap their benefits at 3,000 or less per month and can raise premiums or cancel coverage at any time. Finally, if you leave your job, a group policy is rarely portable.

When planning for disability, don't forget to review your health insurance coverage as well. Check out all the options offered by your company and try to at least get a $1 million lifetime ceiling on your major medical. "It sounds like a lot, but it really isn't if you suffer a major catastrophic illness," observes Charles Inlander, president of the Allentown, Penn.-based People's Medical Society.

Watchdog Your Pension

The vast majority of pension plans are well administered and financially solid. But not all. The Department of Labors Pension and Welfare Benefits Administration has only 400 investigators to keep tabs on 1 million private sector plans with some $3 trillion in assets. "Government investigators can review fewer than 1% of these plans each year," warns Cindy Hounsell, staff attorney with the Pension Rights Center, an advocacy group in Washington, D.C. "You have to be your own watchdog."

If a company folds, a fully funded pension plan could survive unscathed, But most plans are underfunded by the time a company folds. According to the government's Pension Benefit Guaranty Corp. (PBGC), some 15,000 plans covering 5 million people are underfunded by a total of $51 billion. The biggest offenders? Companies concentrated in the troubled automobile, steel, airline and tire and rubber industries. For the roughly 67,000 plans covered by the PBGC's federal pension insurance fund, at least part of the benefits are protected. But the PBGC sets caps on benefit amounts ($29,250 for plans terminated this year) and may further reduce benefits for retirees under the age of 65.

Marvin D. Clarke, 59, of Moundsville, W.V., learned the hard way. As a loader at a local chemical plant, he worked for 34 years at the toughest shifts--nights, weekends and nearly every holiday--in order to qualify for pension benefits of $2,100 a month. But in 1991, a year after he retired, his former employer filed for bankruptcy. When the PBGC stepped in to administer the company's underfunded pension plan, Clarke's benefits were slashed by $700. "I thought my pension was protected," says Clarke bitterly. "The way I look at it, I've been robbed."

To avoid a similar fate, make it your business to know your pension inside and out. There are two basic types: defined-benefit plans, in which the employer promises a benefit based on the employee's years of service and salary; and defined-contribution, in which the employer contributes to an investment account or pension fund for the employee.

Lately, the trend among small- and medium-sized companies has been toward defined-contribution plans, which shift more responsibility to the employee. Participants in 401(k)s--one of the most common defined-contribution plans--usually have a menu of investment options, including guaranteed investment contracts (GICs) sold by insurance companies, stocks and mutual funds. To be safe, diversify your 401 (k) as widely as possible (see "The 411 on 401 (k)s," Personal Finance, April 1993).

Take the time to review your plan documents every year, and pose any questions to the plan administrator. In addition, you can monitor how your plan is managed by requesting a copy of the Summary Annual Report (SAR) and the more detailed Form 5500. These documents reveal your plan's return on investment, and whether it lost money during the past year. (The plan administrator is required by law to provide copies upon written request.)

Scrutinize Form 5500 for unusually high administrative expenses (line 35). Check lines 30e and 30f for illegal transactions involving related parties such as company officers, directors or union officials. Other red flags: frequent changes in investment managers and high brokerage commissions that may indicate churning of pension accounts. For more information on interpreting Form 5500, send for Protecting Your Pension Money from the Pension Rights Center (see "Additional Resources").

When it appears that plan administrators are making unwise investment decisions, inform them in writing. If you suspect mismanagement or wrongdoing, contact the nearest field office of the Department of Labor's Pension and Welfare Benefits Administration. Provide a short summary of the problems you have found, together with supporting documentation.

Finally, if you're nervous that your company may be going under, get defensive: Find out whether you can take your money in a lump sum and roll it over into an IRA. You'll need to discuss any tax consequences with an accountant. But by taking such a precautionary route, you're at the very least exercising some financial control.

ADDITIONAL RESOURCES

* Veribanc Inc. rates the financial strength of thousands of banks and thrifts nationwide. To obtain a $10 "instant rating" on your institution, call 800-442-2657. More detailed research reports are also available for $45 each.

* The Pension Rights Center in Washington, D.C. publishes Protecting Your Pension Money ($8, Pension Publications, Suite 704, 918 16th St. NW, Washington, DC 20006).

* A good primer on disability insurance is the Health Insurance Association of America's What You Should Know About Disability Insurance (Write to the HIAA at P.O. box 41455, Washington, DC 20018).

* Keep tabs on the safety rating of your insurance company by consulting A.M. Best Co. Inc.' Best's Insurance Reports Monitor, available at most libraries. The strongest companies receive a grade of A++.