Living in Vancouver is wonderful – temperate climate, quaint coffee shops and eateries, lots of activities, and globally recognized scenery.  However, the downsides include expensive real estate on a fault zone and high cost of living. With the sticker shock of earthquake insurance, many Vancouverites opt to save money on premiums for their insurance packages rather than sacrifice lifestyle choices. The daily double shot lattes are kept in the budget, but home earthquake insurance is rejected as too expensive.

What does it cost?

I recently reviewed earthquake insurance with my insurance broker, and it isn’t cheap – it can represent up to 50% of your annual premium. In today’s inflationary world, many of us would prefer earmarking those dollars towards cost-of-living needs rather than budgeting for the ‘what if’.  But if we delve into the financial consequences of not taking the coverage, earthquake insurance may require a second look.

The unthinkable scenario

What if Vancouver was hit with a major earthquake, a disaster so large that electricity, food supply, sewer infrastructure was all crippled? If our personal residences were so badly damaged that you couldn’t safely remain in your house? Where would you get the money to finance your family’s contingency plan and move forward? Given that the Provincial Government has excluded earthquakes as an eligible event for receiving financial disaster relief, earthquake coverage may be your best answer!

Click the link below to read more about the provincial government support following a natural disaster.

British Columbia Provincial Support – Financial Assistance in a Disaster 

Earthquake coverage – what is it?

Earthquake coverage is an add on to many homeowners’ insurance packages for specific geographic locations. Your eligibility is based on your postal code and it may not be available to some folks living in the Lower Mainland due to geological risks including fault zone and ocean proximity (e.g.: Richmond). For the rest of us, lets take a deeper dive.

How it works

In the event of an earthquake your family is protected in three ways:

• replaces the full value of your house if it is destroyed (e.g.: $1M)
• covers the belongings that were destroyed by earthquake damage (e.g.: $150,000+)
• covers additional living expenses and accommodations while the claim is being adjudicated and the home is being rebuilt (eg: VRBO at $2500 x 18 months).

In the event of claim, the homeowner’s deductible is 10% to 15% of the home’s value (e.g.: $150,000 on a $1M home) while the insurer picks up the rest.

Insure up or insure down?

An additional earthquake buydown rider is available which reduces your 10% to 15% deductible for an additional cost on your annual premium package: for my home it’s about $500 more per annum. This protects $150,000 of my money needed for a deductible if I had a claim – over 10 years, my cost is only $5,000! With the growth in Vancouver real estate, this might be good value. Another option is to cover just the building reconstruction and opt out of replacing your damaged goods to reduce your premiums. Either way, the insurance may be your cheapest alternative to other financial options at your disposal.

What are your other options?

Consider the alternatives and ask yourself a few questions:

• Do you hold enough free capital to replace your home?
• Could you manage cashflow for a period of 18-24 months and still pay your mortgage on a home that is no longer standing?
• Would the bank lend you money on a home line of credit given that the home is no longer saleable?
• Does this kind of disaster wipe out your family’s financial future by using existing savings in your registered and non-registered portfolios?
• Have you factored in withholding and capital gains taxes? What if it happens in a poor market year and you must sell when it’s down 20%?

Clearly, earthquake coverage protects more than your home – it protects everything you have worked hard to achieve.

No one wants to add more to their budget, but considering the trade offs, this is one expense that you want to keep on your personal balance sheet.  Maybe it’s time to chat with your insurance broker… and make them buy the latte!