The dangerous economics of living without homeowners insurance

By Chris Taylor

NEW YORK (Reuters) – Owning a home can feel like a risky business, from paying the mortgage every month to worrying about disasters like fires, floods or tornadoes.

But here’s something even more dangerous: Going without home insurance in the US altogether.

It’s called “going bare,” and 12% of American homeowners report doing just that, according to a study by the Insurance Information Institute (III) and Munich Re. This is up from just 5% in 2015.

In some areas, it’s estimated to be even higher — between 15-20% of Florida homeowners, the highest percentage in the nation, according to III.

This means that if disaster strikes, you’re “self-insured” — a fancy way of saying you’ll need to find the funds to rebuild. Unless you happen to have hundreds of thousands of dollars, this will not be pleasant.

“To think you can recover from a major disaster like a hurricane, tornado or wildfire without homeowner’s insurance is unrealistic for 99% of U.S. homeowners,” says Mark Friedlander, III’s director of communications.

Stripping is still quite uncommon: This is because if you get a mortgage on the property, lenders usually require proof of home insurance.

And yet, some homeowners are choosing to take on this risk. One reason for that is high costs: Average home insurance premiums are now $1,759 a year for $250,000 of home coverage, according to financial information site Bankrate.com. This is 23% more than a year ago.

Second, coverage can be hard to come by, as some insurers aren’t writing new policies or are pulling out of high-risk areas altogether. Ultimately, they face their own rising costs, from severe weather events to increasingly expensive building materials.

As a result, some homeowners are taking the biggest gamble and going without any coverage at all – which is enough to make their financial planners pull their hair out.

“I live in Florida and there are no good solutions here,” complains Dennis Hunt, a planner in Melbourne, Florida. “I have several different client families who have chosen to drop their home insurance coverage due to rising premiums. I obviously advised against it.”

To avoid such a big game, here are some tips.

SHOP AROUND AND GET DISCOUNTS

Before you quit, put in the work and see what kind of fees you can get. That means diligent comparison shopping – according to Bankrate research, Erie, Auto-Owners and USAA insurers offer some of the lowest rates available.

It also means loading up on any potential discounts you may not realize you’re eligible for.

These include combining with another policy such as motor insurance (generates an average discount of 10%-25% on both policies), being no-claims, loyalty discount (being a long-time customer of your insurer), installing a security system, adding smart home appliances or being a retiree or senior citizen, Friedlander says.

CONSIDERS PERSONAL CIRCUMSTANCES

There’s no one-size-fits-all solution here – and some planners say that in limited and rare cases, self-insurance may be a legitimate option.

“What if the land is worth more than the house?” asks Kevin Dunleavy, a financial planner in Orlando. “What if it’s a rental that’s really a wreck? What if the client has enough investable assets to consider self-insuring? I think there are times when giving up home coverage for much less expensive liability-only coverage makes sense.”

CHANGE THE POLICY

If the punitive premiums are scaring you, there are ways to mitigate the costs. A common method is to increase the discount. This means you’ll have to cover more modest claims out of pocket, but at least you’ll still be covered in the event of a catastrophic loss.

In addition, you can “change your policy type from an HO-3 to an HO-2,” suggests Bankrate insurance analyst Shannon Martin. An HO-2 policy is more basic coverage, where specific risks must be named.

“Both changes can provide significant savings,” says Martin.

If you decide to “go bare”, just understand that the bill may eventually come, and it could be very high indeed.

Just ask financial planner Paul Monax of Littleton, Colorado, whose town was devastated by massive hail storms last summer, damaging roofs up and down his street.

“I have a neighbor who decided to self-insure,” Monax recalls. “They’re replacing their roof out of pocket — for about a decade’s worth of premiums.”

(Editing by Lauren Young and Aurora Ellis)

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