Homeowners Self-insurance

What is homeowners self-insurance?

Homeowners self-insurance is when you use your savings or investments to cover potential losses or risks in lieu of purchasing an insurance policy and paying monthly premiums. Note that automobile liability insurance is mandatory in almost all states, and that mortgage companies usually require homeowners insurance.

Who can afford to consider self-insuring their home?

Self-insurance is an option for individuals who:

  • Have a high income
  • Have no dependents
  • Are close to retirement
  • Have paid off their mortgage
  • Have enough resources to cover losses

How much should you be prepared to pay if you choose to self-insure?

Property insurance policies provide coverage to rebuild your home and any detached structures, replace your contents, and provide additional living expenses if you need to live elsewhere after a major loss. So, the potential total loss if you choose to self-insure is about 200 percent of what your home is worth (excluding the value of the land).

However, the self-insurer is losing the purchase price and cost to restore the property, which may amount to more than 200 percent.

What are the benefits of self-insurance?

Self-insurance allows individuals to retain the money they would have spent paying annual insurance premiums. These individuals can use those funds to build up a nest egg, which can be maintained if they do not experience losses.

Self-insurance also allows individuals to choose what they want to insure.

Additionally, some people decide to self-insure—partially or fully—on one type of property, so that they may afford more comprehensive insurance for another asset which they believe has greater potential liability. This is significant for cases when an individual may limit their self-insurance for basic auto or minimal life to carry more comprehensive coverage on a primary home.

What are the risks of self-insurance?

If you lose your job and or otherwise become unable to set aside enough money to cover your self-insurance, you may not be able to pay for damages to your property.

In addition, insurance on a primary home is not tax deductible, though it can be on a rental property.

Even if you have significant financial resources, the cost to repair major damage to your property could exceed the amount of money you have available at the time of loss. You could also experience multiple losses, or damage events, in a short period of time, which can also quickly deplete savings and investments.

It is also important to consider that not fully restoring your home due to a lack of resources or not having a policy in place can shift the losses to surviving dependents in the event of your death.

Finally, you need to consider your liability if someone is injured at your home or sues you for some risk related to your property. If the total cost of this liability is greater than your self-insurance, you are responsible for these damages, which can have significant financial consequences.

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