The most intelligent approach to considering earthquake insurance, as with other kinds of insurance, is to buy coverage only when the lack of it will create a financial burden. In short, it is necessary first to decide at what level of loss — $25,000, $50,000, or $100,000 — the repair or rebuilding of your home becomes an unacceptable burden. This is an individual financial question, but we can look at a hypothetical case to help in making this judgment.

LET'S ASSUME . . .

1. That the cost of replacing your home, the Replacement Cost Value (RCV), is $130,000.

2. Now let's assume that a major earthquake (8+ on the Richter Scale) occurs in your area and your home is either damaged to the extent of 10 percent of the RCV or, on the other extreme, totally destroyed. The dollar loss would be either $13,000 or $130,000 in terms of structure only.

3. Valuable contents of your home may be damaged or destroyed, including furniture, fixtures, and appliances. This cost can be estimated as a percentage of the house damage, say 20 percent or between $2,600 and $26,000 with total destruction.

4. Consider that there will be some dislocation of your family while the home is rebuilt. This could range from two weeks for minor damage to six months for a totally destroyed home (particularly when contractors will be in great demand). At an average weekly cost of $500, for example, this relocation cost could be $1,000 or $12,500.

LET'S ALSO ASSUME . . .

That your liquid assets (excluding a pension fund and social security interests) amount to $232,000.

HOW MUCH IS ENOUGH?

A generally accepted rule of thumb is that you should not risk more than 10 percent of your liquid assets, or about $23,000 in our hypothetical case.

The conclusion that can be drawn in our hypothetical case is that minor earthquake damage can be borne without insurance coverage, but the potential damage from a major earthquake far exceeds safe financial guidelines. This, in turn, suggests that most homeowners in earthquake-prone areas should have earthquake coverage. The coverage should recognize the homeowner's ability to assume some of the loss, up to $23,000 in our example, in return for lower-priced catastrophe coverage that meets the critical financial need.

As when buying any insurance coverage, make sure you understand what is and is not covered, the amount of the deductible, and whether required code upgrades are covered.