Quake Insurance Rattles Pocketbook

QUESTION: Last month’s temblors have us again--thinking about getting some earthquake insurance. But we’re still not convinced that we really need it. Can you help us make up our minds by giving us an idea of what it will cost and what we will actually be getting? Our home is our single largest investment so we want to do the right thing. J. L.

ANSWER: First, you should know that earthquake coverage for your house and its contents is not included in the standard homeowner’s policy. If you want it, you must pay extra. And it is expensive.

According to the Insurance Information Institute, a trade association in San Francisco, most insurance companies charge $2 to $4 a year for each $1,000 worth of protection. This means that to insure a house for $300,000, you will have to spend between $600 and $1,200 a year in addition to your regular homeowner’s insurance premium. Your actual charges will vary according to the age of your house, its size and number of levels, the type of construction used to build it and its proximity to an earthquake fault line.

Your should first call your insurance agent or the company issuing your homeowner’s or renter’s policy. Some insurance companies offer “riders” as additions to the regular policy for specific occurances, such as earthquakes. If this is the case, you may be able to get a more favorable rate from your existing insurance carrier.

What kind of protection do you receive for the rather large earthquake premiums? Typically, earthquake policies have a 10% deductible, which means that you receive no payment for the first $30,000 of damage on a policy with $300,000 of coverage.

Most policies also apply a separate 10% deductible to contents of the house. So if the contents are insured at $100,000, you would not be reimbursed for the first $10,000 worth of damage. In all, the homeowner in the above example would not be covered for a total of $40,000 worth of damage.

So why get it, you ask? Consumer advocates say earthquake insurance should be viewed as protection against a major financial disaster for your family. If you did not have earthquake insurance and your home were destroyed in a quake, you might face financial ruin.

Earthquake insurance, like any other type of catastrophic insurance, should spare you this. In fact, the insurance offers its greatest coverage the greater your problems are. For example, if your $300,000 house were to sustain $50,000 worth of damage from a quake, you would typically be covered for $20,000 after putting up the 10% deductible. But if the damage were $100,000, earthquake insurance would cover $70,000, a much higher percentage of the loss.

Until 1985, when the state Legislature required insurance companies in California to offer earthquake insurance with new homeowner policies, only a handful of homeowners had the coverage. More recently--and especially since the Oct. 1, 1987, quake that rocked Southern California, as many as 20% of households are estimated to be covered.

However, be advised: Most insurance companies have what they call a “magnitude policy.” Under this, companies refuse to write new earthquake insurance policies for a certain period of time after earthquakes of a particular magnitude. Moratorium periods and the magnitude levels triggering them vary by company. According to the Insurance Information Institute, this requirement is aimed at preventing the writing of new policies while the possibility of aftershocks still exists.

You should also know that you may not need special earthquake insurance to have at least some coverage for damage caused by a quake. For instance, fires that occur as the result of a quake can be covered under the normal fire insurance portion of the homeowner’s or renter’s policy. A car damaged because a tree falls as a result of a temblor can be covered by the comprehensive portion of car insurance.

‘Bite the Bullet’ on Taxes From Home Sale

Q: I am one of those people cashing out of the California real estate market and moving to the Midwest. We expect to sell our house here for about $500,000 and buy a house there in the $200,000 range. Based on what we paid for and put into our current house, our accountant tells us that we could realize a taxable gain of perhaps $170,000 on the sale and face federal and California taxes totaling about $67,000.

Besides buying a more expensive house in the Midwest, which we want to avoid, what can we do to shield some of that gain from the tax man? Could we, for example, lend some of it to the buyer of our California house? D. W.

A: Yes, you could make a loan to the buyer of your house, and yes, that loan would forestall the tax consequences of your purchase of a less expensive house in the Midwest. But a delay is the most you could expect from making the loan. Your tax obligation is never going to be erased, and our tax advisers say that deferring your tax payment actually could leave you exposed to a higher tax bill should Congress increase tax rates.

According to the personal finance advisers we consulted, making a loan to the buyers of your house probably doesn’t make a lot of sense for you, given the possibility that tax rates will be increased. Unless you’re close to age 55, at which point you can take advantage of the one-time tax sheltering of $125,000 in profits on your personal residence, the consultants’ advice is to “bite the bullet” and get on with your new life in the Midwest.

Moving IRAs From Failed S&L; Often Easy

Q: I have individual retirement accounts in several savings and loan institutions and am increasingly concerned about the solvency of these institutions. If one of the institutions where I have an account fails and the Federal Savings and Loan Insurance Corp. pays off depositors, how would the Internal Revenue Service treat this payment? Would it be treated as a withdrawal and subject to income taxes and early withdrawal penalties, or would I have a chance to roll it over into another IRA? J. A. W.

A: We sure hope you haven’t been losing any sleep over this issue because your IRA investment, as long as it is in an FSLIC-insured institution and you have no more than $100,000 in any one association, should be well protected in the event of an S&L; failure.

To begin with, in the majority of S&L; closings, deposits are passed along to the new owners of the institution with no interruption in service to the account holder. In fact, except for being notified of the change of ownership, you are unlikely to know the difference.

However, in the event your S&L; is liquidated and you receive a FSLIC insurance payoff, you have 60 days in which to reinvest the funds in another IRA without penalty. As far as the IRS is concerned, the insurance payment is treated as though you voluntarily decided to withdraw the IRA from one institution and move it to another.

Of course, you could suffer some inconveniences in the event your association is liquidated. For one, you may not be able to reinvest your funds in an account paying as much interest as you had been receiving. Furthermore, you would have to wait another year after reinvesting your funds to move them a second time. However, these restrictions would probably seem inconsequential after having survived a S&L; failure with your account intact.

Carla Lazzareschi cannot answer mail individually but will respond in this column to financial questions of general interest. Please do not telephone. Write to Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, Calif. 90053.