Is Earthquake Insurance A Necessity?
Kimberly and her husband have a tight budget and want to know what Dave thinks about earthquake insurance now that they have a remodeled home.
QUESTION: Kimberly in Los Angeles and her husband have a tight budget and want to know what Dave thinks about earthquake insurance now that they have a remodeled home. Dave says it’s a good idea because of where they live and that it would bankrupt them if an earthquake happened.
ANSWER: An earthquake without earthquake insurance would bankrupt you. And you have earthquakes in Los Angeles. Get earthquake insurance. That’s how you decide about insurance.
The purpose of insurance, when you take a class on insurance or risk management in college, is to transfer risk that you cannot handle by yourself. That’s why I say don’t buy extended warranties on your stupid stereo. If it breaks, get you another one or get that one fixed. You can handle that risk. Self-insure through that kind of risk. But if you have a young family at 32 years old with three kids and Dad passes away in a workplace accident, you’ve got to have life insurance, because that’s a devastating blow to that family if you don’t. That’s a risk you cannot absorb.
In your case, you couldn’t absorb an earthquake, and you have at least a reasonable probability of one. I don’t buy insurance on things where there’s no probability or virtually no probability.
The higher the deductible, the lower the premium. You can’t get a smaller deductible on this than 15%? If you can, it may get very expensive. In the insurance world, that’s called the first dollar. If the first dollar—the deductible—out of pocket is on the consumer, the consumer has a whole lot more care and a whole lot less likelihood to file claims and that kind of stuff. The people who file claims with $250 deductibles versus people who file claims with $1,000 deductibles is more than four times. It’s a different kind of a person. You just don’t think about insurance if it’s a small thing. You just fix it if you’ve got a big deductible. In this case, 15% would be a pretty big hit, because I’m guessing this is an expensive home. I’m guessing you’d have a hard time even doing that much. If you crank the deductible down, you’re going to see your premium go through the roof. I think it’s like walking around without health insurance or without homeowner’s insurance. You wouldn’t have a home without homeowner’s insurance. I don’t know what the probability of an earthquake versus a fire in Los Angeles is, but they’re both a reasonable risk that I want someone else taking if I’m in your shoes.