Should I buy earthquake insurance for my home?

1. Your earthquake risk
2. Your ability to absorb a major loss
3. The cost and deductible of the policy

Consider buying earthquake insurance if:

• You live in an area with meaningful seismic risk.
• Your home is your largest asset.
• Rebuilding or repairing major damage would be financially difficult.
• You have substantial home equity to protect.
• Your home is older or more vulnerable to earthquake damage.
• The premium is reasonable relative to the protection provided.

You may not need it if:

• You could comfortably rebuild or repair your home using savings and investments.
• The premium is very expensive relative to the risk.
• The policy comes with a deductible so large that you would effectively be self-insuring most losses anyway.
• You are willing and able to accept the financial risk of earthquake damage.

One important thing to know

Standard homeowners insurance policies typically do not cover earthquake damage. Earthquake coverage is usually purchased separately as a policy or endorsement.

Pay close attention to the deductible

Earthquake insurance often has a much higher deductible than standard homeowners insurance. Instead of a fixed dollar amount, the deductible is frequently a percentage of the insured value of the home.

For example, if your home is insured for $500,000 and your policy has a 15% deductible, you could be responsible for the first $75,000 of covered damage before insurance pays.

A practical rule of thumb

Earthquake insurance is generally worthwhile when:

• A major earthquake could create a financial loss that would significantly impact your long-term finances, and
• The annual premium is small relative to that potential loss.

Think of it less as protection against minor repairs and more as protection against a rare but catastrophic event.

Questions to ask before buying

• What is my home’s replacement cost?
• What deductible would I have to pay?
• Does the policy cover personal property and temporary living expenses?
• How much would I receive after a total loss?
• Can I afford the deductible if a claim occurs?

Bottom line: If a severe earthquake would threaten your financial security, earthquake insurance is worth serious consideration. If you have sufficient resources to absorb a large loss yourself, self-insuring may be the more economical choice.