Little Equity, No Quake Policy--Could You Abandon Your Home?

Q: We decided to bite the bullet and buy earthquake insurance, even though our policy through USAA is pretty expensive. Some folks we know have passed on the insurance because they have little or no equity in their homes. Their attitude seems to be “let the bank have it”: If an earthquake devastates their home, they plan to just walk away. What do you think of that?

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A: Unfortunately, your neighbors’ attitude is understandable.

Say you’ve got $15,000 equity in a home insured for $300,000. In high-risk areas, your annual insurance premium through the state-run earthquake insurance pool could easily exceed $2,000--and you would be forced to pay a 15% deductible, or $45,000, before your coverage would kick in.

Clearly, there’s no economic incentive for you to stick around. Why pay $45,000, plus yearly premiums, to save a $15,000 investment? Well, there’s one reason: You’ve promised to repay the mortgage. But I suspect more than a few people would let the numbers overpower their sense of moral obligation and would simply walk away from the rubble. And, in fact, more than a few people did just that after the Northridge earthquake.

Depending on how your home was financed, the lender might come after your other assets, and at the very least, walking away would trash your credit record. But the people who plan to walk away figure there will be many, many other folks in their position, thus lessening the chance their lenders will be too tough on them and increasing the chance some other lender will be sympathetic and willing to extend more credit.

It sounds as if you might have some equity to protect, however, so your decision is also a rational one. You know that spending $45,000 to save $100,000 or more in equity would be painful, but you’re willing to do it.

Also, your coverage through USAA--a company that insures only current and former military officers and their dependents--probably offers the option of lower deductibles and much more comprehensive coverage than the state plan.

What makes absolutely no sense is ignoring earthquake risk entirely, and there are thousands, if not millions, of Californians doing exactly that. Whether you have insurance could be irrelevant if your house collapses, with you and your family in it, because you failed to bolt the home to its foundation, or if the water heater kills a few of you as it explodes.

Even simple $5 measures like bolting a heavy bookcase to the wall or removing glass-covered artwork from over the bed aren’t taken as often as they should be.

Tim McCormick, director of the city of Los Angeles’ Anchor L.A. program, estimates that a $2,000 to $3,000 structural retrofit cuts the risk of earthquake damage by up to two-thirds. Some cities offer low-interest loans to help pay for retrofitting, and the state Department of Insurance gives grants to some low-income homeowners to help pay for the work. McCormick say some contractors even offer no-interest 12-month financing.

Whether or not you opt for earthquake insurance, it makes sense to retrofit.

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Q: Two of my banks merged and now my deposits at the one institution total more than $100,000. My banker tells me my total assets are safe because the government would not allow banks to falter. I find this hard to believe, since I can recall the bank failures of the Depression era. I would appreciate your opinion.

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A: This is why you should never, ever listen to a bank employee when it comes to explanations of FDIC account insurance--or bank safety, for that matter.

Your banker is right that there are more safeguards in place to prevent depositors from losing money than there were during the Depression. But the biggest safeguard is Federal Deposit Insurance Corp. insurance, and that generally is limited to $100,000 per individual.

The limits can be tricky when it comes to multiple accounts and trusts, so if you have questions, you should call the FDIC consumer affairs office at (800) 934-3342 or write to 550 17th St. NW, Washington, DC 20429.

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Liz Pulliam is a personal finance writer for The Times and a graduate of the certified financial planner training program at the UC Irvine. She will answer questions submitted--or inspired--by readers on a variety of financial issues in this column. She regrets that she cannot respond personally to queries. Questions can be sent to her by e-mail at liz.pulliam@latimes.com or mailed to her in care of Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053.