Just about everyone has heard about Japan’s recent tsunami disaster. But did you know about the insurance disaster that went along with it?

A New York Times story entitled Japan’s Government Likely to Bear Much of the Loss explains some of the anticipated ramifications of last week’s earthquake and resulting tsunami. Of the $300 billion in damages, only a tiny portion — three percent — was covered by insurance. We saw on the news that much of the damage was to residential areas and roads, not to mention its three nuclear reactors — so apparently, most of this stuff was not fully insured. Was it a mistake for the Japanese people — and their government — to not have more comprehensive insurance coverage on these items?

How Much Insurance Do You Need?

When it comes to how much insurance is really necessary, the answer depends on the situation. Influencing factors include what the law requires, and what a person can afford, as well as what kind of item is at stake and how the item is used.

 

As a homeowner, I want my residence to be covered at replacement cost — because if anything happens to it, I’ll want to replace it! That’s a simple answer, for me. If you are still paying off your mortgage, your lender most likely requires that you keep certain minimum insurance coverage — generally, the amount you owe. Sometimes, as long as it doesn’t go against your mortgage agreement, you can reduce the amount of insurance coverage on your home so that you’re only covered for what you owe. But remember this — if you only insure your home for what you owe, your family could end up homeless and without a way to replace your home. Unless you can afford to replace your home at its current market value, you’re taking a real chance unless you fully insure your home.

Insurance coverage requirements on motor vehicles varies between states. In Maryland, you must carry both collision, comprehensive, and liability coverage on a vehicle that you’re still making payments on. Once you own the vehicle outright, you can drop the coverage to liability only. Personally, I have always reduced my car insurance to the minimum level required once I have the option. Why? Because insurance is expensive, and unless you’re required to carry a certain level of coverage, it can cost more for the insurance than it would to simply pay for repairs as they become necessary. I find that this is even more often the case as the vehicle ages and continues to lose resale value.

The truth is, insurance companies are in business to make money. So on average, they collect way more in premiums than they ever pay out. (If it didn’t work out this way, you can be sure they’d hike their premiums up until it did.) So for items for which the law doesn’t require insurance, consider carefully how much you need — because there’s an excellent chance that your homeowner’s or renter’s insurance may well cover much of what you own, assuming it is kept in your residence. (Check you homeowners insurance to find out what your actual coverage is — from there, you can decide whether or not you want to increase it.) Of course, these policies probably don’t cover general wear and tear on items such as appliances, so you’ll need to decide whether additional insurance is something you want.

Items like large kitchen appliances, I’ve started buying those extended service plans for — because these types of appliances tend to require some expensive repair way before it’s reasonable to replace them. (In other words, not all the parts are wearing out at the same time, so simply replacing the appliance doesn’t make as much sense.) Electronics that are more susceptible to damage because I carry around with me that or that have mechanical parts (like keyboards, turntables, etc.), I get the service warranty for.

What We Can Learn from Japan’s Tsunami Insurance Disaster

The losses caused by Japan’s tsunami were unprecedented — but they were certainly the exception to the rule. I don’t know that in the final analysis I would have expected the Japanese government to fully insure all the government roads and buildings that ended up being destroyed — that may well have cost them more in insurance premiums over the years than the actual losses. Because insurance companies are in business to generate profit — and profit in their pocket comes from somewhere.

But as an individual, seeing devastation like that the Japanese are enduring sets me on a personal rampage of examining my life — taking whatever precautions I can to make sure that my family is protected from similar losses. And insurance is a big part of what I look at.