Hurricanes and earthquakes are a stark reminder of the importance of getting natural disaster insurance. As a long time resident of San Francisco, I wonder if I should get natural disaster insurance for earthquakes every single year.
San Francisco lies close to the San Andreas fault line. It could start shifting at any moment. The last big earthquake was the Loma Prieta earthquake on October 17, 1989 which killed 63 people. Perhaps we are due for the next big one.
California mandates insurance companies send earthquake insurance prospectuses to all homeowners every single year. Each time I look over the pamphlets, I’m tempted to get insurance for earthquakes.
But, I never go through with it because of the enormous deductible of around 10-15%. In other words, if my home is worth $2 million dollars, I’d have to pay the first $300,000 out of pocket before getting anything from the insurance company. Furthermore, the yearly premium on insurance for earthquakes is around $5,000.
Here’s a helpful checklist of questions to consider before deciding to purchase insurance for earthquakes and other natural disasters.
Homeowners tend to downplay the risks they face because hardly anything really ever happens. Even when a hurricane does pass through, chances are high nothing will happen to your home.
If you live in a coastal state, Texas, Louisiana, or Hawaii, you are subject to hurricanes. Those located west of the Rockies, in Alaska, New England, and along the Mississipi River, are subject to earthquakes.
If you live right on the coast, in low lying areas, or near water, you are subject to floods. Basically, disaster can strike anywhere at anytime. You’ve just got to figure out how risk prone you are.
After the 1989 earthquake, homeowners in danger zones were mandated to “earthquake proof” their homes with stronger foundations.
All new construction after 1989 also required stricter foundation construction. As a result, buildings are now safer than ever before.
Obviously we won’t know how strong our homes are until angry nature comes, but we should believe the more we invest in disaster mitigation, the better we will come out at the other end.
Before and after I bought my first house, I asked my neighbors how the 1989 Loma Prieta 6.9 earthquake affected our block. One neighbor who has owned his building since 1975 told me not a lot happened.
Some dishes fell off the shelves, but that was about it. However five blocks west of us several houses had to redo their facades due to cracks.
The houses that sustained structural damage were situated 15 blocks away as they were built on top of sand.
After speaking with my neighbors and doing more earthquake research, I estimated $25,000 in damages could occur if a similar 7.0 magnitude earthquake hits.
Then, I compared $10,000-$25,000 to the cost of insurance for earthquakes. Taking the deductible + $5,000 in annual premiums into consideration, I decided it wasn’t worth it.
It’s important to assess realistic estimates of what a disaster might cost out of pocket. Now that I think more of it, $25,000 is probably too low since construction costs have increased over the decade.
The less money in emergency savings you have tucked away, the more you need insurance for earthquakes and other natural disasters.
If the worst happens, you want to have enough money saved for emergencies. This way you don’t have to dip into your retirement savings, or your children’s 529 college savings fund.
Having natural disaster insurance and a reliable emergency fund also protects your relationships with friends and family. Too many relationships are ruined when money gets involved.
Given our homes are often our largest asset, there’s no doubt many people count on their homes to provide rent-free security once the mortgage is paid off, or rental income if they are a landlord in retirement.
Some may even depend on their homes to do a reverse mortgage for income. Whatever the case may be, the higher your home is as a percentage of your net worth, the more you need to consider getting disaster insurance.
This is probably the only situation where having little to negative equity is a good thing if disaster strikes. You can simply walk away from your house without the need to repair it.
Disasters are one of the biggest reasons why people should not pay down their mortgage. As I wrote before, the ideal mortgage amount is $750,000 if you can afford it.
That $750,000 is debt your bank will eat if something bad happens, not you. For those of you who have lots of equity in your home, definitely raise your consideration of getting disaster insurance.
When you have insurance, you’re less likely to get assistance from the government. However, government programs exist to help when things get really bad.
FEMA or the Federal Emergency Management Agency can provide temporary housing and grants for emergency repairs. For example, one of my friends received help from FEMA to repair a creek bridge on his land that was destroyed in a severe flood.
Sometimes, the Small Business Administration (SBA) also offers up to $200,000 in low-interest loans for rebuilding.
Just be prepared mentally and financially that rebuilding costs tend to soar when natural disasters strike. This is why insurance for earthquakes, floods and hurricanes can help protect you financially.
Are you still trying to decide if you should purchase insurance for earthquakes? Here’s a look at some of California’s largest earthquakes and some noteworthy facts.
|7.9||Jan. 9, 1857||Fort Tejon||2 killed, 220-mile surface scar|
|7.9||April 18, 1906||San Francisco||3,000 killed, $524 million in property damage, including fire damage|
|7.8||March 26, 1872||Owens Valley||27 killed, 3 aftershocks of 6.25+|
|7.5||July 21, 1952||Kern County||12 killed, 3 aftershocks of 6+|
|7.3||Jan. 31, 1922||West of Eureka*||37 miles offshore|
|7.3||Nov. 4, 1927||SW of Lompoc*||No major injuries, slight damage|
|7.3||June 28, 1992||Landers||1 killed, 400 injured, 6.5 aftershock|
|7.2||Jan. 22, 1923||Mendocino||Damaged homes in several towns|
|7.2||Nov. 8, 1980||West of Eureka*||Injured 6, $1.75 million in damage|
|7.2||April 25, 1992||Cape Mendocino*||6.5 and 6.6 aftershocks|
|7.1||Oct. 16, 1999||Ludlow (Hector Mine Quake)||Remote, so minimal damage|
|7.1||May 18, 1940||El Centro||9 killed, $6 million in damage|
|6.9||Oct. 17, 1989||Loma Prieta||63 killed|
|6.7||Jan. 17, 1994||Northridge||61 killed, $15 billion in damage|
|6.6||Feb. 9, 1971||San Fernando||65 killed, $50 million in damage|
Insurance companies are there to make money. They can only exist if the collective premiums they take in, and the returns they make from the premiums consistently beats the claims they pay out.
You need to be prepared to FIGHT for every claim. Some insurance companies make it extremely difficult for you to collect, especially during times of low investment return. The horror stories I hear in the health insurance industry are absolutely despicable.
What I recommend everyone do is find a respectable insurance company and concentrate as many policies as you comfortably can so that you build leverage.
For example, bundle your auto, property, umbrella policy, and disaster insurance together. Your agent will love you, and you will be tiered as a higher valuable customer. As a higher valued customer, they will give you less grief during filing, and will also give you the best rates.
I pray the big one never hits San Francisco just as I pray all of you never have to experience such disaster.
Hopefully this article will help you make a more informed decision about purchasing insurance for earthquakes and other natural disasters.
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If you’re in an area prone to natural disasters, explore as many homeowners insurance policies as possible. And look into the costs and coverage of natural disaster insurance.
Compare the insurance premiums to the cost of a total rebuild and make a calculated decision. There is no such thing as retroactive insurance!
Each year that goes by without paying insurance premiums is a win. But after many years of winning, you might want to use your winnings to sleep well for the rest of your life.
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Updated for 2021 and beyond. The amount of earthquakes, wildfires and hurricanes seem to be increasing. There hasn’t been a huge earthquake in America recently, but it’s likely coming.