As a first time homeowner, I was surprised to see the archaic process to purchase homeowner’s insurance. Most people learn about the need to purchase insurance when they’re about to close a home loan. Your lender will require you to purchase insurance before the loan is closed. Let’s start by discussing the less popular coverages – earthquake and flood.
Earthquake Insurance – To buy or not to buy
In California, homeowner’s insurance will typically cover you for most natural causes except earthquakes and floods. You’ll likely be surprised by how expensive earthquake coverage is – in my case the quote was 4-5x homeowner’s coverage. Also, the only place you can get earthquake coverage is the CA Earthquake Authority as most private companies stopped even offering that as an option. Now, the big decision is whether to should buy earthquake insurance or not:
– Peace of Mind: You’ll rest assured that in case the big one hits, you’re covered. Keep in mind that you need additional coverage for loss of use (hotel/temporary housing etc.) in addition for full peace of mind!
– Expensive: As mentioned above, it’ll cost you a pretty penny. Also, this is an annual premium so every year you’re paying a recurring expense.
Some other factors to keep in mind in your decision:
- Age of home: If you have an older house, you may be in more need of coverage since the foundation is likely built before the latest code/standards were available
- Seismic retrofitting: Your home inspection report will likely touch upon the condition of the foundation and whether any additional support devices such as anchor bolts etc. have been added for safety in case of an incident.
- Location compared to fault lines: How close/far the home is compared to the closest fault lines. You can find a detailed map for California over here.
Another point of view
Some homeowners I spoke with had a different perspective: they recommended spending money on seismic retrofitting and upgrading the house rather than paying the high premium for earthquake insurance. This is more of an investment rather than an expense as you’ll likely recover some of it when you sell your house.
If you do go down this avenue, I’d highly recommend getting a structural engineer to come inspect your home and foundation as the first step. Keep in mind that there are many contractors who specialize in seismic and foundation work but make sure to ask them whether they are an engineer. One recommendation we have is George Drew. After talking to a few inspectors and contractors, he came highly recommended and as a truly honest and objective person. Disclaimer: We have no affiliation to him or his firm; please do your own due diligence.
Let’s talk floods
Flood insurance is a slightly different animal. If your new home falls in a flood zone, your lender will likely require flood insurance so you’re not given much option there. However, the good news is that flood insurance is a lot cheaper and you have options. You can get coverage through FEMA (Federal Emergency Management Agency) or a private insurer. You’re best bet is to go through an agent since FEMA doesn’t sell directly to customers.
Earthquake insurance is not an easy decision. It’s expensive but at the same time forgoing it implies living with a big risk. Look at all the factors listed above, get a quote and then make up your mind.
Have any comments or a different perspective? Feel free to leave us a comment! Coming soon – more about homeowner’s insurance and where to find the best prices!