• Thu. May 23rd, 2024

I Asked a Financial Planner About Getting Earthquake Insurance

A few months ago I was helping my mom revisit her homeowners insurance to see if she should add an earthquake insurance policy. And to be blunt, I found it all very confusing.

I was unsure about how the deductible worked, and my mom said that many relatives and friends decided against it because FEMA supposedly could provide assistance should an earthquake strike. So I reached out to Seok Dahl, an insurance agent at Farmers who is based in Los Angeles, to answer some of my questions.

Dahl explains that homeowners insurance and earthquake insurance are two completely different policies. “It’s like comparing apples to oranges. Even though they’re about your property, earthquake insurance only covers property from ground movement.”

Here’s what I learned about getting earthquake insurance.

1. Your deductible is based on the current value of the home

Unlike homeowners insurance, where it’s a set dollar amount that you pick, and is usually anywhere from $500 to $1,000, your earthquake deductible is a percentage of the current value of your home. So if your home is valued at $500,000, and the deductible is 10%, then you need to pay $50,000 before insurance kicks in.

While an earthquake deductible is usually anywhere from 2% to 20%, in states where there’s a greater likelihood of an earthquake — and in turn a higher risk — the deductible starts at a higher percentage. The California Earthquake Authority, which provides most of the earthquake insurance policies where I live, has deductibles starting at 5%. My jaw dropped when I figured this out, and I asked my mom’s insurance agent several times if this was indeed correct.

2. Your earthquake dwelling insurance cannot be less than your homeowners dwelling insurance

As Dahl explains, the dwelling portion coverage of your earthquake insurance has to match or be higher than the dwelling portion coverage of your homeowners insurance. So if your home is insured for $500,000 under your earthquake insurance policy, it should also be insured for $500,000 for your homeowners insurance.

Like homeowners insurance, the three main types of coverage are:

  • Dwelling coverage. Dwelling coverage will pay to rebuild your home to its current value. It doesn’t include contents or land, but it does include fixtures and permanent appliances.
  • Contents coverage. Contents coverage will pay to replace or repair your belongings, such as furniture, clothing, electronics, and appliances.
  • Loss of use. Should you need to temporarily uproot because of damage to your home from an earthquake, loss of use coverage can pay for the cost of accommodations, meals, and in some cases any loss of wages.

3. Earthquake insurance includes some exceptions 

While earthquake insurance technically includes most damage and destruction to your home in the case of a ground tremor, there are some exceptions, such as a fire. “Even if fire arises from that earthquake, maybe from the eruption of a gas line, that’s not covered under your earthquake insurance, but from under your home insurance,” says Dahl.

Damage to your vehicle is also not usually covered, and you would need to purchase a separate policy should there be flooding. Last, any damage to your land — think sinkholes, landslides and erosion — isn’t covered by earthquake coverage.

4. FEMA only offers assistance in the case of a president-mandated order

Contrary to what one might believe, FEMA is not an insurance policy, says Dahl. In turn, FEMA cannot replace your insurance policy. FEMA only steps in when there’s a catastrophic disaster. So if there was a minor shake but your home suffered damage, you can’t call on FEMA.

“You might think that the government is stepping in to rescue you for your damage,” she says. “But it has to be a catastrophic event that’s severe enough for the governor to request the federal government to step in to help the state. And only the president has the right to execute that order.”

There is also a maximum amount of assistance that FEMA can offer per household, and that’s $36,000. That being said, the average amount FEMA pays out is $5,000.

5. Earthquake insurance may or not be a good fit for you

While Dahl obviously thinks it is a good idea to have earthquake insurance, it’s expensive coverage — it’s largely a personal decision. To help you gauge whether it’s a good choice for your needs, Dahl recommends considering factors such as your personality, lifestyle, and your asset profile.

Unlike a fire, earthquake insurance can cover a severe or minor event, explains Dahl. Think about the pros and cons of getting earthquake insurance. “You’ll want to ask yourself, ‘Do I want to pay this earthquake insurance for the protection of my house?’ If you can’t afford to pay for earthquake insurance, then, you shouldn’t. That’s because you’re going to have to end up canceling it anyway.”

And because there’s such a high deductible on earthquake insurance, it only really comes in handy during a catastrophe. But if much of your assets are tied into a home, it also might be a good idea to get earthquake insurance.

Last, if you’re the type of person who is going to sit and worry all the time, it might be a good idea to purchase earthquake insurance, says Dahl. “But the choice is yours. I’m a worrywart, and I’d rather spend that extra money each year and have peace of mind.”

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