Wednesday, January 9, 2008

earthquake insurance

Another friend asked me if I have earthquake insurance and why. I thought that was a very good question too. Definitely, one of those financial education and planning type of question that I like to discuss here.

Here is my reply:

Yes, I buy earthquake insurance for my personal home and but have a high deductible. Here are 3 reasons why..

1) I believe that if you are prepared for the worst then the karmic odds of the worst happening is reduced. In part, I'm just worried. You never know when the next big one is going to hit, but it has been a long time since the last big one in SoCal. I know that the history of earthquake doesn't predict the next one but I can't shake the feeling another one might be around corner.

2) I doubt the math would ever make sense to buy insurance but I can't afford not have the insurance in case the worst happens. Suppose there is a major quake and your house is damaged / destroy. I still owns the mortgage and HELOC, but no place to live and not enough cash reserve to rebuild. I can't get money to rebuild because I can't get a new loan. No house that I can sell. I can't sell the the land to cover the mortgage and HELOC.

At this point, I'm bankrupt. GAME OVER. I'm living on the streets. A likely scenario that my house is only partially damaged in a major earthquake and my deductible is too high to collect. I'm only protected from bankruptcy.

3) I buy because earthquake insurance is expensive. I know that sounds quite silly. The way I look at the situation is that if risk of earthquake is low then the premium would be low. The insurance companies can sell a lot insurance to a lot more people if the premium was lower and they can make more profit. The risk is high therefore the premium cost is high. I believe that insurance company are 100x smarter and 100x the knowledge compared to me. They probably have a team of Ph.D.s running risk models. If there enough competition between various earth insurance companies, then the price should be reflective of the risk. Not like auto insurance where service actually matters to some people because we all regularly deal with auto insurance. The expected service is not a factor in my decision, only premium cost vs. coverage.

On a side note, by the same logic, I buy a small amount of universal life insurance. Death is for SURE and the insurance company for SURE will pay and therefore the premium is very high. On the other hand, 5 or 10 year term insurance is cheap for my age but the odds of me dying in that time frame is very low. I know most people don't recommend universal life insurance but I went against the common logic. (Perhaps an entry for the blog if people are interested.)

In summary, my reasons for buying earthquake insurance: It makes me feel better, protection against bankruptcy, and betting with the house instead of against the house. In my sometime overly active imagination, there is a universal roulette ball rolling and I hope it never lands on the "00" but just in case, I'm covered for the financial worst case scenario.

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