Earthquake Insurance
2010-01-25 by Eva RosenbergToday TaxMama reads an article from Al Tompkins at Poynter.org who ponders “Is earthquake insurance worth the cost?”
Well my friends, that’s an excellent question.
And I am expecting, and welcome, rebuttals from insurance agents!
Back before the Northridge earthquake in California, I was of the firm belief that anyone in California who owned property and did not carry earthquake insurance was flat out irresponsible. We all know earthquakes are coming; take responsibility.
Since the Northridge Quake, though, earthquake coverage has gotten bizarre. The primary exclusion from coverage is 10% – 15% of the value of your home. It used to be more like $5,000 – $10,000. Now, that means your coverage will not pay a dime until you sustain over about $20,000 in damages. (Note: Median home price in California is over $300,000 – assume 1/3 for value of land – http://www.svdaily.com/realestateprices.html ).
Most homes don’t sustain that much damage. For instance, the home we bought only lost a chimney. It cost about $5,000 for the previous owners to replace it. For most people, except those right near the epicenter – or specifically along a fault line, damage to the physical property was under $10,000.
Reimbursements for personal property damage, living expenses for temporary housing, and a variety of other reimbursements have dropped dramatically to a few thousand dollars. You used to be able to get coverage that would pay for housing for at least one year; personal property for the limits you set, etc.
The cost for the coverage tends to be on the high side – close to $1,200 for that median priced home.
Since really powerful quakes don’t seem to hit the same area more often than every 20 years or so, consider banking your premium for those 20 years, instead of paying it to an insurance company. Even if you earn as little as 2% a year after taxes, compounded annually, you’d have well over $30,000 waiting for you when that earthquake hits. Naturally, over 20 years, interest rates will rise, so the balance will be much higher. http://www.dinkytown.net/java/CompoundSavings.html
The only trick is to remember to pay yourself each year!
Naturally, if you are near a major fault line or in a particularly active earthquake area – do both. Pay yourself each year, so you have the money to cover the deductible AND carry the coverage!
You can apply this same logic to other kinds of insurance coverage whose benefits have diminished while costs have risen, like flood coverage.
And remember, you can find answers to all kinds of questions about what if decisions and other tax issues, free. Where? Where else? At TaxMama.com.
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January 25th, 2010 at 07:22 am