Understanding what natural disaster insurance is and whether it's worth it is important if you live in a high risk area. Let's learn how floods, wildfires, hurricanes, and earthquakes are covered under an insurance policy for natural disasters.
I'm a multiple property owner in San Francisco which is a high risk area for earthquakes. Over the years I've felt dozens of earthquakes here. Fortunately, none of them were large enough to cause any damage. Since I moved here, I've researched natural disaster insurance for earthquakes quite a lot over the years.
A Natural Disaster Can Strike At Anytime
Before I sold my house in the Marina district of San Francisco, I always had a slight worry whether it would survive the next big earthquake. The Marina district is a highly desirable neighborhood in the north end of San Francisco. But, it is mostly underlain by saturated silts and sands that may liquefy if another large earthquake hits.
The last big earthquake in San Francisco was the Loma Prieta earthquake on October 17, 1989. It killed 63 people and collapsed a section of the Bay Bridge. In addition, it caused several buildings to burn down in the Marina due to ruptured gas pipelines.
Natural Disaster Insurance Is Expensive
However, each time I got a mandatory earthquake insurance offer in the mail, I passed. The deductible (10% of value of home) was so high and the premium ($5,000+/year) was too expensive.
I'd ignore the risk I was taking until I'd get the same offer in the mail the next year. I figured worst case, I'd have to spend $650,000 rebuilding a 2,300 sqft structure.
Now that I don't own a home surrounded by liquefaction, I do feel a sense of relief. It's as if I “escaped” almost 13 years of ownership without experiencing a natural disaster.
Fear Mongering Abounds
So many people who don't live in San Francisco constantly reminded me about the risks of earthquakes before I bought. Then after I bought, even more people from SF who didn't/couldn't buy a home tried to instill fear in me.
What gives folks? Can't you just be happy for someone's largest purchase?
As a result, I worried about earthquakes while I was in the process of selling my home. Selling a home is much more stressful than buying a home.
If you don't buy a home, there is no loss except for dashed dreams. If your home falls out of contract when selling, vultures will start circling.
Devastations seem to happen around the country every year. Thus, I've begun to wonder again if I should get natural disaster insurance to cover my remaining properties.
My homeowner insurance policy already covers fire damage. Yours may or may not.
Natural Disasters Affect More Than Homes
What I didn't realize was how much damage storms can do to cars. For example, it's estimated that Hurricane Harvey ruined 500,000 cars by flooding their engines.
Similarly, Hurricane Sandy destroyed about 250,000 vehicles. And Hurricane Katrina claimed about 200,000 according to Jonathan Smoke, chief economist at Cox Automotive.
Therefore, it behooves everyone to ping their auto insurance companies today. Ask about the exact coverage you have. I bet most people have no idea how much they're paying and what it really covers.
I called my auto insurance company and was reminded I have comprehensive insurance on my new family car with a $500 deductible. This surprised me because I thought I was paying for a $1,000 deductible. At least now I know.
Comprehensive insurance should cover your car from flood damage, hail, a tree falling on your hood, and everything else you can think of. You'll usually be reimbursed for your ride's actual cash value (ACV) after you pay your comprehensive deductible.
Natural Disaster Insurance Can Save You From Bankruptcy
What's shocking is that only about 20% of the 1.6 million homes in Harris County, where Houston is located, had flood insurance, according to emailed data from the Insurance Information Institute. For those homes in “high-risk” areas, only 28% of the homes had flood insurance.
Please think about this scenario for a moment. Let's say you're a proud homeowner without natural disaster insurance. Then a natural disaster destroys your home unexpectedly. If you have a mortgage to pay, a car to replace, and a home to rebuild out of pocket, there could be no way out of this type of financial disaster except for bankruptcy.
Besides private insurance companies, the federal government offers special coverage for high risk areas. For example, they offer flood insurance coverage through the National Flood Insurance Program at an average cost of about $700 per year. Of course, the premiums vary depending on your property's flood risk and value of the house.
For low-risk homes with the maximum coverage of $250,000 for the dwelling and $100,000 for possessions, the premiums are about $405 per year, or $452 if you have a basement. If your home is of higher value, it looks like private insurance companies may be your only option.
Here's a video that really shows how Hurricane Harvey affected one person's home and cars. The fella successfully saved three BMWs, but could not protect his home from damage.
I'm pretty sure after seeing this video, if you live in a high risk area, you'll be motivated to explore as many homeowners insurance policies as possible!
How To Decide Whether To Get Natural Disaster Insurance
Insurance companies stay in business because they collect more in premiums than they pay out in claims. It's actually a great business if you look at the profit figures of all the major insurance companies.
Therefore, as a consumer, you probably don't want to get more insurance than is required by law because you know it'll likely never be used. That said, here's a checklist that may help you determine whether getting flood or earthquake insurance is a good move.
Here are some questions to think about and helpful suggestions on how to decide whether to get natural disaster insurance or not. Whether you like it or not, climate change is affecting the decision-making process of where to own a home.
Do you live in a high-risk area?
If you live in an eastern coastal state, Texas, Louisiana, or Hawaii, you are subject to hurricanes. Those who live west of the Rockies, in Alaska, New England, or along the Mississippi River, are subject to earthquakes.
In addition, if you live right on a coast, or in any low lying area, you are subject to floods. If you own a beachfront property, the ocean may eventually reclaim some of your property. Such property loss will hurt the value of your property, so be aware.
Basically, a natural disaster can strike anywhere at anytime.
When was the last time you invested in natural disaster mitigation?
After the 1989 earthquake in San Francisco, homeowners in danger zones were mandated to “earthquake proof” their homes with stronger foundations. All new construction after 1989 also requires stricter foundation construction.
As a result, buildings are now safer than ever before. Obviously we won't know how strong our homes are until angry nature comes. But we should believe the more we invest in natural disaster mitigation, the better we will come out at the other end.
Although my new primary residence is not on liquefaction, I did spend some money reinforcing the structure and applying new bolts to the frame. In addition, the condo association at one of my rental properties is spending about $100,000 – $130,000 retrofitting our building due to an SF law.
Have you talked to your long time neighbors?
One of the first things I did before and after I bought my house in the Marina district was ask my neighbors how the 1989 Loma Prieta 6.9 earthquake affected our block.
One 69-year-old neighbor who has owned his building since 1975 told me not a lot happened at all. Some dishes fell off the shelves, but that was about it.
However, five blocks west of us several houses had to redo their facades due to cracks. The houses that sustained structural damage were situated 15 blocks away as they were built on top of sand.
What is the estimate of potential damages?
After speaking with my neighbors and researching the 1989 earthquake, I made a realistic $100,000 damage estimate if a similar 7.0 magnitude earthquake hits.
Then I compared that $100,000 estimate to my earthquake insurance deductible of $150,000 + $5,000 in annual premiums. Ultimately, I decided it wasn't worth it.
When you're trying to decide if you should purchase natural disaster insurance, it's important to assess realistic estimates of what a disaster might cost you out of pocket.
How big is your emergency savings?
The less emergency savings you have, the more you may need natural disaster insurance. If disaster strikes, you could borrow from your 401K, draw money from a HELOC, or go directly to friends and family.
However, you probably don't want to resort to that. One of the keys to achieving and maintaining financial independence is planning for unexpected emergencies.
This is in addition to everyday budgeting and retirement planning. Otherwise, all of the wealth you've created could be greatly jeopardized.
How dependent is your retirement on your home?
Our homes are often our largest asset. Thus, there's no doubt many people count on their homes to provide rent-free security once the mortgage is paid off. Or rental income if they are a landlord in retirement.
Some may even depend on their homes to do a reverse mortgage for income. Whatever the case may be, the higher your home is as a percentage of your net worth, the more you need to consider getting natural disaster insurance.
How much equity do you have in your home?
This is probably the only situation where having little to no equity is a good thing if a natural disaster strikes.
Potential disasters are one of the biggest reasons why people should not pay down their mortgage. If you had the ideal mortgage amount of $1 million, your bank ends up eating the cost if you run away.
What If The Natural Disaster Is Really Bad?
The only positive out of a really bad situation is that the Federal Emergency Management Agency (FEMA) might step in to provide grants for emergency repairs and temporary housing.
Meanwhile, the Small Business Administration (SBA) may offer up to $200,000 in low-interest loans for rebuilding.
Rebuilding costs soar during times of emergency. This is largely due to an upward shift in the demand curve. Inevitably, there may also be price increases by suppliers of materials and services to help mitigate such a surge in demand.
Lines for gas at the pump may last for hours. Meanwhile electricity might not come back on for weeks, if not months.
The worst feeling is losing everything and not knowing if you will ever recover if you don't have natural disaster insurance. Then, the second worst feeling during a disaster situation is having insurance, and not knowing whether you will ever collect.
Here's a video highlighting what type of damage Category 1 – 5 hurricanes can do. For those who are investing in heartland real estate, it's best to bake in potential natural disaster damages into your returns.
Build Goodwill With Your Insurance Provider
It's unfortunate to hear so many frustrating stories about insurance companies not paying out a claim when something bad happens. The only thing I can recommend is to go with an insurance carrier that's been around a long time.
In addition, select a provider with a healthy balance sheet. Use them for multiple financial products to build good will so they decrease the chance of screwing you.
For example, you may want to bundle your auto, property, umbrella policy, and flood insurance together. Your agent will love you, and you will be tiered as a more valuable customer. Thus, they should give you less grief with claims, and should also give you the best rates.
Once, I filed a $7,500 claim for a lost watch (lost it on the beach or somewhere in Oahu). I spoke to the personal property insurance agent for 10 minutes, answered questions, and got a check for $7,500 three weeks later.
They didn't give me a hard time because they've been making lots of money off me for the past 20 years.
More Assets, More To Worry About
With record breaking temperatures, massive wildfires, and violent hurricanes each year, there's something to be said about having only one car and one house. Otherwise ongoing maintenance and insurance costs really start putting a damper on your sense of freedom.
Get Insured Today
If you're in an area prone to natural disasters, explore as many homeowners insurance policies as possible. And look into the costs and coverage of natural disaster insurance.
Compare the insurance premiums to the cost of a total rebuild and make a calculated decision. There is no such thing as retroactive insurance!
Each year that goes by without paying insurance premiums is a win. But after many years of winning, you might want to use your winnings to sleep well for the rest of your life.
Readers, do you have flood or earthquake insurance? If so, what is your coverage and monthly premium? Has your home or car ever gone through a natural disaster? What was the cost to rebuild/replace?
Note: You can't really game an insurance company and get flood insurance right before a big hurricane hits. You usually have to wait at least 30 days before the insurance kicks in.
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