Earthquake Insurance: Should You Get It?

With the recent Japanese quake and subsequent stories about the vulnerability and possibilities of similar disasters striking here in the U.S., many homeowners are wondering about protecting their primary asset, their home, should a large earthquake hit their region.

Whether you should or should not have earthquake insurance is a conversation you should have with your insurance agent who provides your homeowners’ coverage.

When considering earthquake coverage three questions to consider are:

• What exactly are you protecting
• What is your deductible
• What will be your cost

1) What exactly are you protecting? How much equity do you have in your home? Are you upside down? Do you have ten or fifteen percent equity in your home?

2) What is your deductible? Most insurance companies offering earthquake coverage have very high deductibles, usually 10% or 20% of your coverage. If your dwelling is insured to rebuild for $200,000 then your deductible is either $20,000 or $30,000 in these cases. Does this exceed your equity in your home? If so, do you feel it worth the cost to pay not only premiums but also a deductible to rebuild your home given the current value? If your home is valued at $450,000, you owe $415,000 and your deductible is $20,000, do you feel it makes sense for you to get earthquake insurance? A difficult question to answer.

Finally, if there is partial destruction of your property, but not complete, the cost to repair may be just beyond your deductible, say $30,000 to repair some damage as the house was not a complete loss to the earthquake.

3) What will be your cost? Premiums depend on a myriad of factors, as most insurance premiums do. Type of home, zip code, deductible, etc., all factor into your premium. The analysis of premium comes down to how much it is worth to you per year to insure how much equity against how much of a deductible? It is a risk-benefit analysis that only you can answer, with the assistance of your insurance professional providing the costs and deductibles.

If your premium is around $500 per year and you have significant equity you may decide there is a good value in obtaining a policy. If your premium is over $1,000 per year, you have little equity and a large deductible you may feel the value of the policy is not worth the premium. And should your home undergo significant destruction in an earthquake, are you comfortable walking away from the home and the mortgage(s)?

There is no set ‘yes; or ‘no’ answer to ‘should I get earthquake insurance?’ Every situation is different and every family’s comfort level of risk and benefit is different. Answering the question however is a valuable exercise and one every homeowner should engage in annually when reviewing their insurance coverages.