Thursday, September 18, 2014

Why Californians don’t invest in Earthquake Insurance Part – 2

Rationalizing the reasons to avoid spending on earthquake insurance is easy. Starting with the reason, “It always happens to the other guy” to more complex justifications, there are a huge number of excuses for not buying a policy. Among the most common are:
  • A home survived the last quake without any damage. That may be so, but it is not a good enough reason. Each quake is different and a region that has historically only suffered from mild tremors could have a major quake tomorrow. Just as there is no way to accurately predict where and when an earthquake will happen, there is no way to know how strong the next one will be. Historical precedent means nothing. In addition, new fault lines are being discovered regularly and even if there has never been a quake near a newly discovered fault, it is no guarantee that an earthquake could not happen next week.
  • A home is earthquake proof. New construction techniques can be used to make a structure more earthquake resistant. Retrofitting of older homes to enable them to withstand stronger temblors is possible. But there is no such thing as a completely earthquake proof home. There is no technology available today that can protect a home from a truly massive quake. And even if the techniques that can increase a home’s quake resistance, exist today, these very same techniques need to be properly applied. For example, bolting a home to its foundation, is a popular way in increasing quake resistance. Regardless of these new developments, studies show that while it may be of some help in protecting a one story wood framed building, structures of two or more stories, those with big gaps in the frames and those with big picture windows are more likely to suffer quake damage, if bolted to the foundation. And a strong foundation is of no use if the ground beneath the home crumbles completely, like the earthquake that hit Anchorage Alaska in 1964, when a whole neighborhood was washed out to sea.
  • FEMA will come to the rescue. Homeowners affected by an earthquake may be eligible for low interest FEMA loans to help them rebuild and get back on their feet. Remember however, that these are loans; the money, along with interest, will have to be repaid. Moreover, these loans will be added to a person’s net worth statement as a liability which will offset the equivalent quantum of assets. Another factor to take into account is the growing reluctance in Congress, faced with numerous natural disasters, to hand out money to those who did not bother to get insurance to protect themselves.
  • Let the bank take it. Those with very little equity in their homes, owing to huge mortgages or other reasons like large decline in home prices, may be tempted to hand over the keys of a ruined home to the bank and walk away. Even the little equity available will be lost and perhaps more importantly, their credit rating will suffer, consequently making it very difficult to finance another home for a very long time.
Don’t Set Aside the Odds

Granted many may argue that the odds of an earthquake striking their homes down, are more in their favor. Many may reason that the probability of winning a lottery ticket is much higher than the probability of an earthquake happening in their neighborhood. Stop! Think! Winning a lottery ticket would be awesome, but lack of earthquake insurance, when calamity strikes, would be disastrous. All of the above reasons also would not be of any help, when it is too late, especially when you live in an earthquake prone region. 

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