earthquake and life insurance?

[cars+FIRE]

Hi all,

I have typically adopted the mindset that insurance companies exist to create profit for themselves and their shareholders, and the way they make their money is through my premiums paying out statistically less than what I pay in.

So I never do extended warranties, carry higher deductables, etc. to minimize my exposure.

After reading MMM and going on an optimization spree, I started evaluating two insurances under a different microscope.

1.) life insurance
Myself and my wife each have a $500k 30 year term plan, that costs us each about $375/year.  We are about 5 years in.  This is to protect our mortgage that we are also about 5 years into.
Since we've gotten the plan, my wife has since quit her job (and we had a kid) and we are relying solely on my income.  Also, we have started paying down the mortgage such that it will be paid off 15 years from now. 

When we first got it, it was because we were both paying on the house together, and the loss of one of us would ensure that the house could be paid off and that the money could be used to help stabilize things.  At this point, we owe about $280k on the house.  I think having it on me is necessary as my wife would need the money during the transition period of both finding a job and securing care for our child.  But keeping it on her?  Note that the long term plan is for her to go back to work, us have one more kid, and use her income to provide towards our future, final home and college expenses.  We'd both retire about 20 years from now, which would roughly match the end of this term, and the payoff of the "final" house.  We got these plans as healthy 26 year olds to "lock in" good rates.

What are your thoughts on keeping this insurance? 


2.) earthquake insurance
We live in CA, and our homeowner's policy does not include earthquake damage, so there is a separate rider necessary.  It covers the dwelling and has a 10% deductable, which works out to about $30k.  The premium is $175/yr

The earthquake one is tough because I feel if there is a big enough event in our area to result in a total loss of our dwelling, that FEMA or some other sort of government aid would kick in.  I am not a freeloader, but at the same time, is it a waste of money to be spending $175/yr in perpetuity for something that has close to 0% chance of being used?

Thoughts?

[nereo]

What are your thoughts on keeping this insurance? 

It makes sense to have a term life insurance policy on both of you so long as you would need to hire child-support or day-care should something happen to your wife.  She might not be 'working' but you probably couldn't keep working without incurring some massive expenses should she pass away.

That said, get rid of the term life insurance just as soon as you have enough assets that you no longer need it.  If both of you start working again you will have LESS of a need for life insurance, not more.

re: earthquake... insufficient information.  You need to consider how far you are from a major fault line, the construction of your building and lots of other factors.  When I lived 7 mi from the Loma Prieta site (quake of 1989) I did not carry any additioanl earth-quake insurance.  Don't know if that was smart or dumb.

[lackofstache]

What are your thoughts on keeping this insurance? 

It makes sense to have a term life insurance policy on both of you so long as you would need to hire child-support or day-care should something happen to your wife.  She might not be 'working' but you probably couldn't keep working without incurring some massive expenses should she pass away.

That said, get rid of the term life insurance just as soon as you have enough assets that you no longer need it.  If both of you start working again you will have LESS of a need for life insurance, not more.

+1, keep it now, you'll need it if she goes & you're taking care of the kid.

[Sibley]

First, as a SAHP, your wife is very possibly working harder than you. She just doesn't currently earn money for it. If you figure out everything she does in childcare, housework, managing life, etc, then you may be shocked.

Regarding the earthquake - even in Cali there's a huge variation of risk. Where are you in relation to the faults? What's the risk of a big quake? If there was a big one, could you pay the $30k deductible? I lived in Sacramento for 6 years and only felt one baby quake, though there were at least 10 that I knew of.

[cars+FIRE]

First, as a SAHP, your wife is very possibly working harder than you. She just doesn't currently earn money for it. If you figure out everything she does in childcare, housework, managing life, etc, then you may be shocked.

Regarding the earthquake - even in Cali there's a huge variation of risk. Where are you in relation to the faults? What's the risk of a big quake? If there was a big one, could you pay the $30k deductible? I lived in Sacramento for 6 years and only felt one baby quake, though there were at least 10 that I knew of.

I'm in Orange County.  We would be able to pay the deductable.  I have no idea what the risk of a big quake is, but based on a premium of $175/yr that covers $300k, the insurance company seems to believe the risk is low.

Re: My wife - I know for a fact she works harder than me.  I think her job is invaluable and I hope that my post doesn't somehow come across as marginalizing that??  This is merely a practical discussion as to whether I should keep the policy on her, given that my income can cover our expenses, including hiring out child care, should it come to that.

PS: I am an active participant in our lives as well so there is no "figuring" out what she contributes and no "shock" either.  Not sure why you chose to go down that road of assumption.

[mtn]

I'd definitely keep the life insurance for both of you. Someone who lost his wife at a young age very unexpectedly told me to get more than you think is necessary. There will be unexpected expenses that you cannot prepare for, like the furniture that you need to replace because you shared it and you can no longer stand to look at without crying.

I personally know that I would need to quit my job immediately. I'd eventually go back, but the grievance allowance, while very good, isn't good enough for me. So I'd need to have enough to replace the income+enough to replace my income for a year.

EDIT: Earthquake insurance is $175 a year? Pay that without question. If the big one hits, you don't want to be waiting on FEMA.

[cars+FIRE]

I'd definitely keep the life insurance for both of you. Someone who lost his wife at a young age very unexpectedly told me to get more than you think is necessary. There will be unexpected expenses that you cannot prepare for, like the furniture that you need to replace because you shared it and you can no longer stand to look at without crying.

I personally know that I would need to quit my job immediately. I'd eventually go back, but the grievance allowance, while very good, isn't good enough for me. So I'd need to have enough to replace the income+enough to replace my income for a year.

EDIT: Earthquake insurance is $175 a year? Pay that without question. If the big one hits, you don't want to be waiting on FEMA.

I had that thought too.  I'd most likely need to quit my job if that ever happened.  So I guess that answers the question on life insurance for her.

[Retired To Win]

Hi all,

I have typically adopted the mindset that insurance companies exist to create profit for themselves and their shareholders, and the way they make their money is through my premiums paying out statistically less than what I pay in.

So I never do extended warranties, carry higher deductables, etc. to minimize my exposure.

After reading MMM and going on an optimization spree, I started evaluating two insurances under a different microscope.

1.) life insurance
Myself and my wife each have a $500k 30 year term plan, that costs us each about $375/year.  We are about 5 years in.  This is to protect our mortgage that we are also about 5 years into.
Since we've gotten the plan, my wife has since quit her job (and we had a kid) and we are relying solely on my income.  Also, we have started paying down the mortgage such that it will be paid off 15 years from now. 

When we first got it, it was because we were both paying on the house together, and the loss of one of us would ensure that the house could be paid off and that the money could be used to help stabilize things.  At this point, we owe about $280k on the house.  I think having it on me is necessary as my wife would need the money during the transition period of both finding a job and securing care for our child.  But keeping it on her?  Note that the long term plan is for her to go back to work, us have one more kid, and use her income to provide towards our future, final home and college expenses.  We'd both retire about 20 years from now, which would roughly match the end of this term, and the payoff of the "final" house.  We got these plans as healthy 26 year olds to "lock in" good rates.

What are your thoughts on keeping this insurance? 


2.) earthquake insurance
We live in CA, and our homeowner's policy does not include earthquake damage, so there is a separate rider necessary.  It covers the dwelling and has a 10% deductable, which works out to about $30k.  The premium is $175/yr

The earthquake one is tough because I feel if there is a big enough event in our area to result in a total loss of our dwelling, that FEMA or some other sort of government aid would kick in.  I am not a freeloader, but at the same time, is it a waste of money to be spending $175/yr in perpetuity for something that has close to 0% chance of being used?

Thoughts?

I vote "yes" on both.

My wife and I also carried mortgage-driven dual life insurance to protect each other's finances... until we paid off the house.  And then it definitely became a moot point  once we had enough of a stash to declare ourselves self-insured.

I never owned a house where I needed earthquake insurance; but I have lived where it made total sense to carry flood insurance and/or wind (hurricane) insurance.  For that $175 a year premium you quoted, what the hell?!

[Gen Y Finance Journey]

I'm in the Bay Area, and if I could get an earthquake policy for $175/year, you'd better believe I'd pay it. My homeowner's insurance company quoted me $1314/year with a 15% deductible for earthquake coverage!

[Sibley]

Re: My wife - I know for a fact she works harder than me.  I think her job is invaluable and I hope that my post doesn't somehow come across as marginalizing that??  This is merely a practical discussion as to whether I should keep the policy on her, given that my income can cover our expenses, including hiring out child care, should it come to that.

PS: I am an active participant in our lives as well so there is no "figuring" out what she contributes and no "shock" either.  Not sure why you chose to go down that road of assumption.

Sorry about that. I was pretty cranky about that topic when I posted that - a friend is dealing with a bunch of crap from her husband because "she doesn't do anything all day." And I'd just heard the latest in that saga. I do try to think when I post, but failed in this case. Good for you for your attitude, wish everyone shared it!

[rocketpj]

Not sure how it works for others, but here is how we dealt with the two issues you describe.

1.  Life insurance.  We split our LI into two parts, each for $200K.  One of them will expire after 20 years, and will hopefully be a complete waste of money.  But if it isn't (i.e. one of us kicks it) then the other won't be left a big wall of with childcare expenses etc.  Our youngest will actually be about 16 when it expires, but well out of the 'daycare costs' part of the equation.  The other half is a life term and will work for whomever is left standing -not tremendous wealth, but it will help replace any lost income over the remaining years.

2.  Earthquake insurance.  We live on the West Coast of BC, so it is a bit different from California in that we haven't had a major quake since 1699, but the next one is likely to be a subduction quake 10-100 times stronger than anything the San Andreas tends to produce.  (i.e. up to a 10).  Scary.  If it happens (there is a one in 3 chance in the next 50 years), and we survive, much of the region is likely to be a pile of sticks and rubble, mixed with .  So some insurance will be a necessary part of the solution for us (or our heirs).  That said, it isn't much extra on top of our usual homeowners insurance simply because of the rarity of the event.

[No Name Guy]

In re the earthquake ins:

OK, so you're buying up to 270k of coverage for $175 / year - 300k less the 10% deductible.  That's....175 / 270,000 = 0.065% per year.

I think you're off base in assuming that it's an "either / or" - that is, you either won't need it or your place would be a total loss.  It's quite conceivable how a 300k home would suffer 50-100k in damage in a quake.

Imagine all the contents destroyed as if in a big blender - all your kitchen cabinets will be thrown open and the contents tossed about, all the bookshelves will be tossed, any flat screen on a table will hit the floor (and quite possibly many wall mounted ones will as well), mirrors will fall and shatter, etc, etc, etc..Throw in the mess from broken liquid containers (glass jars of food, etc) that may result in ruined carpet.......
Imagine your water heater ripped off the wall, spewing H2O all over (please say you have it strapped down).
Let's say you have a stucco exterior and it's all cracked and flaked off from the flexing the house sees.
Cracked foundation.
Ahhh....that good ole brick chimney is no more, leaving a nice hole in the side of the house where it used to stand - and never mind the collateral damage it does on the way down.
How much would clean up cost?

One reason the insurance is so cheap is that it comes with a high deductible - that first 30k out of pocket means they'll only need to pay if there is SERIOUS damage.  But from an individuals perspective, isn't this EXACTLY the situation that insurance is made for - to cover those low probability but high loss events?  30k isn't going to break a family that can actually afford a 300k home.....but having the improvements totally destroyed without insurance and still having to make a mortgage payment would be a massive hit - you'd be looking at the order of a 200k loss, plus loss to contents (assuming 1/3 land, 2/3 improvements).

Yeah....that's cheap insurance.

[cars+FIRE]

Re: My wife - I know for a fact she works harder than me.  I think her job is invaluable and I hope that my post doesn't somehow come across as marginalizing that??  This is merely a practical discussion as to whether I should keep the policy on her, given that my income can cover our expenses, including hiring out child care, should it come to that.

PS: I am an active participant in our lives as well so there is no "figuring" out what she contributes and no "shock" either.  Not sure why you chose to go down that road of assumption.

Sorry about that. I was pretty cranky about that topic when I posted that - a friend is dealing with a bunch of crap from her husband because "she doesn't do anything all day." And I'd just heard the latest in that saga. I do try to think when I post, but failed in this case. Good for you for your attitude, wish everyone shared it!

No worries.  I did two month-long stints of paternity leave within the first year after our son was born so I got to see first hand how exhausting the job is.  That being said, if I could somehow find a way to get paid what I get paid and stay at home with my family all day I'd do that in a heartbeat!  We always were frugally oriented because we knew we wanted to go down to single income once we had kids, but had I known that you could do a MMM setup and both quit in your prime child-raising years, I would've jumped all over that.  Oh well.  Better to start late than never.

[cars+FIRE]

In re the earthquake ins:

OK, so you're buying up to 270k of coverage for $175 / year - 300k less the 10% deductible.  That's....175 / 270,000 = 0.065% per year.

I think you're off base in assuming that it's an "either / or" - that is, you either won't need it or your place would be a total loss.  It's quite conceivable how a 300k home would suffer 50-100k in damage in a quake.

Imagine all the contents destroyed as if in a big blender - all your kitchen cabinets will be thrown open and the contents tossed about, all the bookshelves will be tossed, any flat screen on a table will hit the floor (and quite possibly many wall mounted ones will as well), mirrors will fall and shatter, etc, etc, etc..Throw in the mess from broken liquid containers (glass jars of food, etc) that may result in ruined carpet.......
Imagine your water heater ripped off the wall, spewing H2O all over (please say you have it strapped down).
Let's say you have a stucco exterior and it's all cracked and flaked off from the flexing the house sees.
Cracked foundation.
Ahhh....that good ole brick chimney is no more, leaving a nice hole in the side of the house where it used to stand - and never mind the collateral damage it does on the way down.
How much would clean up cost?

One reason the insurance is so cheap is that it comes with a high deductible - that first 30k out of pocket means they'll only need to pay if there is SERIOUS damage.  But from an individuals perspective, isn't this EXACTLY the situation that insurance is made for - to cover those low probability but high loss events?  30k isn't going to break a family that can actually afford a 300k home.....but having the improvements totally destroyed without insurance and still having to make a mortgage payment would be a massive hit - you'd be looking at the order of a 200k loss, plus loss to contents (assuming 1/3 land, 2/3 improvements).

Yeah....that's cheap insurance.

Good points.  I need to actually look at the policy and see if it covers contents or just structure.  I can't remember off-hand.

The thing I am frustrated with is that if this sort of event happens, I will have coverage and 90% of my neighbors won't.  And yet, I'm sure "someone" will figure it out for them.  So we end up in the same boat, but I had to pay $175/yr for years and years.

But maybe I'm being too negative about it.  It is cheap insurance and I am doing the "right thing" by not sitting around waiting for a handout after disaster strikes.

[cars+FIRE]

I'm in the Bay Area, and if I could get an earthquake policy for $175/year, you'd better believe I'd pay it. My homeowner's insurance company quoted me $1314/year with a 15% deductible for earthquake coverage!

Holy cow!

[spud1987]

I'm in the Bay Area, and if I could get an earthquake policy for $175/year, you'd better believe I'd pay it. My homeowner's insurance company quoted me $1314/year with a 15% deductible for earthquake coverage!

Holy cow!

Another Bay Area homeowner here. We decided not to get earthquake insurance because of the high cost. It would be $2000 per year for us with a 15% deductible. Also, keep in mind that insurance only covers the structure, not the underlying land. Our structure is worth about 325k whereas our lot is valued at 425k. So earthquake insurance is a lot of money for about 300k of coverage for a property that is 80% owned by the bank. If the big one hits and there is no federal govt aid we will probably let the bank foreclose on the house and eat the 20% down payment. Not a great result but a risk we are willing to take.

[TrMama]

As mentioned, your earthquake insurance is peanuts. Keep it. We pay an extra $700/yr with a similar deductible on a $800K policy. This is the absolute best rate I could find. Thanks to rejigged insurance policies in Canada, new earthquake policies have a minimum $70K deductible. I'm on an island in the PNW and if we get a big subduction quake I'll just be happy if we all survive it. I won't care at all about the "wasted" insurance premiums.

As for the life insurance, I'd also keep that. Are you planing on more kids? That only increases the financial risk if one (or both) of you kick it. DH and I carry large policies on each other. If one of us were to become a widow(er) we don't want to be a broke widow(er). And if both of us kick it, the money goes to our kids who would be raised by our financially reasonable, but not mustachian relatives. I wouldn't want my orphaned kids (or my kind relatives) to suffer financially.

The risk with cancelling a policy you got as a healthy young person is that if you ever want a new policy you're now older and have likely picked up/discovered some health issues that drive your rates up. As you age, Drs look harder for defects. Surprise! They often find them.