Liz Pulliam Weston - Disaster insurance

The Basics

Do you need disaster insurance?

The costs and benefits of disaster coverage are tricky to analyze. Weigh these big pros and cons, plus the specifics of your home, your location and your finances.

By Liz Pulliam Weston

The housing crisis has created vast numbers of homeowners who might reasonably forgo disaster insurance, including:

  • People who are losing their homes to foreclosure.

  • Those who owe more on their homes than the homes are worth.

Of course, the decision not to buy insurance for earthquakes, floods, hurricanes and other natural disasters isn't always conscious. Some homeowners don't realize they're not covered.

But many others, faced with high premiums and policies with limited coverage, gamble that they won't need insurance help to rebuild after a disaster.

So is going bare a smart choice or a dangerous one?

I wish I could offer a concrete answer. Usually I'm a hard-liner when it comes to insurance. As I've written before, in columns such as "3 costly myths about insurance," insurance is best used to protect ourselves against uncommon but financially devastating events, and natural disasters certainly qualify.

But in this case, the cost-benefit analysis is trickier than usual. Sometimes the price of catastrophic insurance is chokingly high while the risk remains remote. My husband and I, living in Southern California, have struggled mightily with this issue ourselves.

The answer for us, and for anyone, depends on three factors: your location, your financial situation and your comfort with risk.

The key is to make an informed choice. And I'm here to help you with that.

1 size does not fit all

First, you need to know what disasters your homeowners insurance does and doesn't cover adequately. A review of your policy and a chat with your insurance agent should alert you to any gaps.

Where you can buy extra coverage depends on the location of your home and the particular catastrophe you're trying to protect against. This is where things get a touch complicated. Earthquakes and floods, for example, aren't covered by standard homeowners policies. If you live in an area that's prone to other natural disasters, such as hurricanes, tornadoes or hailstorms, your homeowners insurance may not cover damage from those calamities, or it may limit the coverage you have.

Here's where you can get the more common types of disaster coverage:

  • Earthquake coverage in most states can be purchased from your homeowners insurance company. In California, most policies are sold by a state-run insurance pool, the California Earthquake Authority, although a few private companies also sell earthquake coverage.

  • Flood insurance is typically provided by the National Flood Insurance Program, which is run by the federal government, although a few private insurers also provide policies. The federal program provides coverage of up to $250,000 for the structure of the home and $100,000 for personal possessions. In areas prone to floods, your mortgage lender may require you to buy the coverage.

  • Hurricane and other windstorm insurance varies by state and sometimes by county. Several states, including Alabama, Florida, Georgia, Louisiana, Mississippi, North Carolina, South Carolina and Texas, offer windstorm coverage pools for people who can't get private coverage. Residents of some coastal counties in Georgia and New York can get wind and hail coverage through FAIR (Fair Access to Insurance Requirement) Plans, which are high-risk pools run by state insurance regulators in conjunction with private insurers. Your insurance agent or state insurance department will have more details.

5 reasons to skip it -- and 3 not to

Once they find coverage, homeowners still may forgo it. The most common reasons are these:

  • "It's too expensive." Disaster coverage can indeed be pricey. The average premium is about $500 a year for flood insurance, although policies start around $120. A windstorm policy might cost hundreds of dollars a year for $100,000 of coverage, or many times that for coastal homeowners. Earthquake insurance can range from a couple of hundred dollars to several thousand dollars a year.

  • "The deductibles are too high." This is particularly the case for earthquake insurance, which typically has a 10% to 15% deductible. That means you have to pay the first $20,000 to $30,000 of damage on a home insured for $200,000 before your coverage would kick in. Deductibles are usually 2% for windstorm coverage (or $4,000 on a $200,000 home), although they range from 1% to 15% of the insured value of the house. Federal flood insurance comes with a much lower deductible, $500 to $1,000.

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  • "The coverage is too limited." Bare-bones California Earthquake Authority policies, for example, cover only $5,000 in damage for all the contents of your home and don't cover swimming pools, landscaping or outbuildings. Additional coverage can be purchased for a higher premium.

  • "It's not mandatory." As noted, if you live in a high-risk area for flooding, your mortgage lender will insist you buy flood insurance. (Ask to see the latest flood plain maps, though.) Otherwise, catastrophic coverage typically isn't a requirement for getting a home loan.

  • "The government will help us out." After a major disaster, the Federal Emergency Management Agency provides small grants for emergency repairs and temporary housing, and the Small Business Administration offers low-interest loans for rebuilding. In fact, if you have insurance, your ability to get government help may be limited. Grants are usually reserved for those who are uninsured, and loans are restricted to amounts that your insurance doesn't cover.

Continued: Why you want coverage

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