Catastrophic coverage? Be wary about declining

Dollars & Sense

October 05, 2003|By Liz Pulliam Weston | Liz Pulliam Weston,SPECIAL TO THE L.A. TIMES

You write quite often about insurance, but I have yet to see a perspective about whether or not to buy catastrophic coverage, such as earthquake or flood insurance. This coverage isn't included in regular homeowners' policies and seems to be awfully expensive, with very limited coverage. I'm tempted to go without, figuring that the government will step in with help if there's a catastrophe.

Yours is the reasoning of many homeowners who go without catastrophic coverage (which also includes windstorm policies in areas where hurricanes are a significant threat). But there are problems with your line of thinking.

Before the Federal Emergency Management Agency can offer homeowners help, the president must declare a major disaster. Although that's routine after big earthquakes and hurricanes, more-contained catastrophes might not merit such a response. The vast majority of floods, for example, aren't officially declared disasters.

Also, FEMA's assistance is more limited than most people realize. The agency's grants for emergency home repairs are limited to $5,000. After that, affected homeowners can apply for loans from the Small Business Administration - but those must be paid back. Between your mortgage and your SBA loan, you could easily wind up owing more on your property than it's worth.

It's true that catastrophic coverage is often expensive. Flood insurance averages $382 a year. Windstorm coverage runs $461 per $100,000 of coverage in South Carolina. Earthquake policies can set you back a few hundred dollars to several thousand dollars, depending on where you live and how much your home would cost to rebuild.

Deductibles are high for earthquake coverage. You're expected to come up with the first 10 percent to 15 percent out of your own pocket - or $20,000 to $30,000 on a home that's insured for $200,000. Windstorm policies typically have a 2 percent deductible, and federal flood insurance comes with a $500 to $1,000 deductible.

But insurance is designed to protect you against the big financial setbacks you couldn't easily cover yourself. If you couldn't afford to rebuild your house with your savings, at least consider catastrophic coverage.

You still might decide to "go bare," particularly if you don't have much equity in your home and you have no problem reneging on your mortgage. Hundreds of homeowners in the Northridge, Calif., area did just that after the 1994 earthquake. Rather than shoulder the costs of rebuilding, they gave their keys back to the bank and walked away.

If you have lots of equity, value your credit rating or like to honor your debts, however, catastrophic coverage can allow you to protect what's probably your largest investment.

You can deal with high deductibles by setting up a home equity line of credit to pay the cost - but do so before disaster strikes.

The appraisal isn't likely to go as well when your home is a pile of rubble.

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