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There isn't simple advice for everyone. Knowing that
statistically you are not in great risk for having your
home devastated by an earthquake is poor consolation
if you do actually get hit. But, on the other hand, in areas with
lots of earthquake activity, the premiums for
earthquake insurance are terribly high, often more than the
entire homeowners insurance premium. On top of that,
the deductibles for these policies are huge,
ranging from 15%-25% of the amount covered.
If you don't have much equity in your home, you would
be paying a lot of money to protect that equity with an
earthquake insurance policy.
Let's say your home was worth $500K and you had
$50,000 of equity in it. Would you want to pay $2,000 a
year in earthquake insurance to protect that $50,000 in the
off-chance that an earthquake destroys your home? And then if your house
were destroyed, you would probably have to pay about a
$70,000 deductible first. You probably would not even have the
money to cover the deductible.
In such a catastrophic event,
you might be better off letting the bank foreclose on your house
and losing the relatively small amount of equity you have invested.
Your credit score would take a big hit, but if you needed to
borrow more money to cover the deductible, you might overextend
yourself, find yourself missing payments, and eventually losing
the home anyway.
If you go without earthquake insurance, you could hedge against
quakes by spending the money that would have gone to premiums on retrofitting
your house (if necessary) or building up your emergency fund.
For those of you with lots of equity in your home
and enough income to cover the insurance premiums, you would
probably sleep a little better knowing you had earthquake insurance.
Plus if you have lots of equity, you should open up
a Home Equity Line of Credit (HELOC). Open one up with as large an amount
as possible, and just leave it untouched. If a huge quake
totals your home, you can use the HELOC to help pay the deductible.
If you get earthquake insurance, be careful and see what it actually
covers. The amount of coverage that earthquake policies provide for
property like your TVs and computers is typically small. Also,
the earthquake insurance policy may not cover flood or tidal wave
damage even if it was caused by an earthquake.
Click here
for more information about how to see if you are in a
high risk earthquake area.
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