What to know about catastrophe insurance

Catastrophe insurance is something many people think about, but too many people pass up. Just ask those in Southern California who did not have fire insurance how they felt when they saw the wild fires ravaging their cities? The fact of the matter is that the 10 most expensive natural disasters in U.S. history all have occurred in the last decade. These catastrophes have resulted in insurance companies having to cover losses averaging $10 billion each year since 1989, compared with just $2 billion yearly from 1980 to 1988. This means two things: one is that you probably need catastrophe insurance more now than you did in the past, and two, it is going to cost you more.

The insurance industry is raising rates on catastrophe insurance, especially in high risk areas. They are basically saying to the homeowner, If you choose to live here, that's great, but you have to take on more of the risk. So what this means is that if you live where tornadoes, floods, hurricanes, and earthquakes are a regular occurrence, catastrophe insurance is going to cost you more, but will be worth it.

The fact is that catastrophe insurance is a great thing to have, and comes in handy if there is a catastrophe. However, with major natural disaster, some insurance companies just can't handle the expense of payouts. So, if you want to make sure you avoid paying more than you need to, and that you are with a company that won't go out of business should a huge disaster happen, ask the following questions:

Do I have proper coverage? You need to be looking at things like whether or not you are in a flood plane, whether or not you live in an area prone to fires, earthquakes, etc. Find out if you need catastrophe coverage by calling your agent or state insurance board, they can give you information about flood, fire, earthquake, etc, risks for your area, and you can consider that as you compare it to risk posed by normal hazards, which your home owner's policy will cover. If you exceed normal risk, buy the extra coverage.

Is the insurer financially stable? Let's face it, if a whole city burns down, this can be costly for insurance companies, and could put them at risk of a default that could leave policyholders uncovered. So, choose a company that will be able to make it. How do you do that? Well, A.M. Best and Standard & Poor's now rate insurance companies to reflect their ability to withstand such catastrophes. Choose someone with an A rating or better.

Can you afford the premiums and deductibles? Are they reasonable? You will see a huge jump in the cost of catastrophe insurance for high risk areas, but that does not mean you should not shop around and see look for companies and region that are not as exposed to catastrophe-related payouts and the cost will be lower. Be cautious of percentage deductibles that require you to pay a percent of the damage rather than a set figure. This can be huge if your loss is huge.

Once you have asked these questions you are likely ready to buy, so do the following three things:

1. Purchase all your insurance from an insurer that offers a multiple-policy discount.
2. Go with a high deductible if you can afford it, as it can save up to 20 percent in premiums.
3. Protect yourself the best you can by installing smoke detectors, a burglar alarm, storm shutters, dead bolts, and a fire-sprinkler system. These can reduce the premium on your homeowner's policy, and protect your home if a catastrophe does occur.