Living Mortgage-Free: Is Dropping Homeowners Insurance a Risk?
Understanding the Risks of Canceling Homeowner’s Insurance
If you're a homeowner without a mortgage, the decision to cancel your homeowner's insurance may seem like a way to save money. However, it's important to weigh the potential risks before making such a move. The cost of insurance can be significant—$4,000 per year is not uncommon—and with a $5,000 deductible, it's easy to see why some homeowners might consider dropping coverage. But is this a financially sound decision?
Assessing the Financial Risk
Canceling your homeowner’s insurance is not necessarily reckless, but it does come with considerable financial risk. If you don’t have a substantial emergency fund, going without insurance could lead to serious financial hardship. A standard homeowner’s policy covers many major risks, including damage from fires, storms, and theft. However, it typically excludes events like floods or earthquakes unless you purchase additional coverage.
Without insurance, you would be personally responsible for all costs associated with repairing or rebuilding your home. This includes not only structural damage but also liability claims if someone is injured on your property. Even if you own your home outright, these risks remain. Going without insurance only makes sense if you have enough liquid assets to cover a worst-case scenario, which could involve thousands or even millions of dollars in expenses.
Rising Premiums and Climate Change
Home insurance premiums have been increasing steadily over the years. According to a survey by Bankrate, the average American pays nearly $2,500 per year for home insurance, up nearly 10% over the last three years. This increase is partly due to rising costs associated with climate change, which has led to more frequent and severe weather events. In states like Florida, California, and Louisiana, insurers have pulled out or significantly raised premiums in response to these escalating risks.
The Treasury Department released a report last year that found the majority of nonrenewals are related to increased costs tied to climate change. Nonrenewal rates were about 80% higher in areas facing the greatest risks from climate-related disasters. Insurers are spending more in high-risk areas, and in some cases, they’re paying out more in claims than the premiums they collect.
Ways to Reduce Premiums
Before deciding to cancel your insurance, consider negotiating with your provider. You may be able to reduce premiums by taking advantage of discounts for security systems, smoke detectors, energy efficiency, smart-home technology, or even being a nonsmoker. Bundling home and auto policies with the same provider can also lead to savings of up to 20% in some cases.
Increasing your deductible may also lower your premiums. While this means you’ll pay more out of pocket in the event of a claim, it could be a better option than facing a $200,000 bill for rebuilding your home.
When to Seek Help
If you’re struggling to find affordable coverage, consider hiring an insurance broker. They can help you navigate the market and find policies that fit your budget and needs. Keep calling different providers and exploring options until you find suitable coverage.
Additional Considerations
It’s also worth noting that roughly one in seven owner-occupied homes in the U.S. is not insured. This trend is driven by factors such as affordability, climate change, and the difficulty of insuring homes in high-risk areas. While you’re not alone in facing this choice, it’s important to make an informed decision based on your personal financial situation and risk tolerance.
Final Thoughts
While the cost of homeowner’s insurance can be a burden, the potential consequences of going without coverage are significant. Before making any decisions, evaluate your emergency funds, assess your risk tolerance, and explore all available options for reducing premiums. By doing so, you can make a more informed choice that protects both your home and your financial well-being.
