Author Topic: Homeowner's Insurance - who needs it?  (Read 4145 times)

retired?

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Homeowner's Insurance - who needs it?
« on: June 09, 2017, 09:42:39 AM »
MMM's 2016 expenses prompted me to post this topic.  He self-insures.

My home is now mortgage-free and I am considering my options.  i.e. I no longer have a lender's requirements to fulfill. 

To use some round numbers, let's say the home's replacement value is 400k sitting on a lot worth 100k.

Generally, I think the likelihood of a complete loss is very low and I'm more concerned about a significant partial loss.  Thus, I'm wondering about obtaining partial coverage.  Insurers, of course, want owners to insure for market value or full replacement value, but I've wondered what they do in case you do not have full coverage, but incur a partial loss.

Suppose you have 240k coverage.  I figured it's likely that insurers don't want to pay (aside from deductibles) 100% for all losses up to 240k and then no more.  But, I've read recently that some states (mine included) require insurers to fully cover partial losses as long as you have coverage for at least 80%, i.e. 320k coverage.

And, in case you have less than 80% coverage, then the coverage on a partial loss is prorated based on the ratio of:

        coverage level / 80% of replacement value.

In the above, with 240k in coverage and 320k being 80% of replacement value, this ratio would be 75%.

This seems like a possible good deal to me if you are interested in 'partially self insuring'.  You pay premiums for 240k coverage on a 400k home and get 75% coverage up to 240k.  e.g. a 160k loss would result in 120k coverage (less deductible).

Granted half-coverage doesn't result in half-premium.  Any of this sound familiar?  Are reputable firms willing to even provide partial coverage?  Any other thoughts?  Anyone do this already?

runewell

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Re: Homeowner's Insurance - who needs it?
« Reply #1 on: June 09, 2017, 10:04:10 AM »
Insurers will usually require you to be insured to 80% of the house's full amount.  This is not because insurers think you should underinsure your house, but guards against the risk that over time the amount of insurance on your policy doesn't keep up with the times.  Your insurance coverage is increased every year in an attempt to deal with this, but not all houses are created equal.

If you are found to be insured to less than 80% of value, the insurers will factor that into how much the pay out for your claim - it will be reduced. 

I think that going without homeowners insurance is foolishness.  Sure, the chance of a total loss is small but you don't want it to be you.  If you want to lower your premium then take a $5,000 or $10,000 deductible, I would like to guess you'll probably save 25%+ off the premium.  Sure, if you have a lot of money you can afford to take this risk.  I will personally pay $800/yr to prevent the loss of $250,000.  Homeowners insurance also protects you against liability claims as well, what if someone trips on your property and has a horrible accident?  Good luck with that.  Beyond the limit, the policy coverages loss adjustment expenses (think legal fees)....
« Last Edit: June 09, 2017, 10:07:31 AM by runewell »

ysette9

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Re: Homeowner's Insurance - who needs it?
« Reply #2 on: June 09, 2017, 10:16:51 AM »
My philosophy on insurance is to self insure for the small things and definitely protect against the things that could have a significant impact in my financial situation. In practice this means I don't insure my iPhone but I do insure my cars, house, and I carry an umbrella policy. You aren't just insuring the house but it also buys you liability insurance in case someone slips and falls on your property or a ladder falls on a friend or whatever. That kind of liabiiity scares me because it is open-ended.

Thinking another way, when I crack my phone screen and have t replace it I am bummed,  it I go on with my day. If something major happened and I had to shell out $200k to replace/repair my house and I had no insurance, I'd be more than bummed. I'd be making major adjustments to me FIRE plans or going back to work if already RE. Why would I take that risk? To save a few hosted bucks a year? It just doesn't add up for my risk tolerance. The upside of saving the insurance premiums will not materially impact my life but the downside sure as heck would.

retired?

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Re: Homeowner's Insurance - who needs it?
« Reply #3 on: June 09, 2017, 10:18:22 AM »
I've found insurers want to insure you for the most possible, even land value.

Yah, I don't feel comfortable going completely without, but in my area, premiums can run $3-4k for the level home I mentioned, so trying to trim down where possible.

I'm wondering if reputable insurers even allow going less than full cost.  For example, my current insurer (Allstate), requires coverage to be full.  i.e. from renewal notice, it looks like they won't even write policies for less than 100%.

runewell

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Re: Homeowner's Insurance - who needs it?
« Reply #4 on: June 09, 2017, 10:40:21 AM »
I've found insurers want to insure you for the most possible, even land value.

Yah, I don't feel comfortable going completely without, but in my area, premiums can run $3-4k for the level home I mentioned, so trying to trim down where possible.

I'm wondering if reputable insurers even allow going less than full cost.  For example, my current insurer (Allstate), requires coverage to be full.  i.e. from renewal notice, it looks like they won't even write policies for less than 100%.

I don't think it's typical to include land value in the total because the insurer doesn't replace the land when your home burns down.  If you're not sure, contact your agent and dispute the figures.  But also don't expect to be able to underinsure your property either.  The 80% provision is only there to protect against changes over time.  It might not be a bad idea to have to your home re-estimated every five years or so just to be safe (if it went up, expect to pay more).

Chris22

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Re: Homeowner's Insurance - who needs it?
« Reply #5 on: June 09, 2017, 10:43:08 AM »
I've never understood the desire to cut corners on homeowners insurance given the potential magnitude of a claim versus the cost of the insurance.  My ~$375k home is insured for ~$1k/yr.  Even if you figure my lot is worth $150k and the rebuild costs of the house are, I dunno, $200k, that's a TWO HUNDRED YEAR payback to forego the insurance.  Not insuring a $5k car for $1k/yr, I get, that's a manageable time horizon.  200 years?  Hell no. 

And that's before you talk about things like liability coverage, etc.  Which is another place I think MMM is out to lunch, his whole "no one is going to sue me, I'm not friends with that kind of jackass and the judge with throw a suit out..."  Bullshit.  Your friend might not sue you, but guess what, your buddy who comes over to help you frame your new shed and he falls 10' and takes an ambulance ride and needs his broken leg fixed etc etc etc...when that guy goes to file a claim with his medical insurance, his medical insurance is coming after YOU.  And if you've got no insurance, now you are footing the bill.  No one is being a jackass except the insurance company, but guess what, too bad.  Glad you saved that $1k/yr though...

Pigeon

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Re: Homeowner's Insurance - who needs it?
« Reply #6 on: June 09, 2017, 10:49:21 AM »
I wouldn't go without insurance.  Complete loss happens.

MIL's house had a pipe burst on the top floor while she was away for an extended period.  The entire house flooded before it was discovered.  It had to be gutted down to the studs.  The insurance company fortunately covered it, but it would have been a disaster if they had not.  It cost tons more to repair it than we got from selling it, even though it was in much better condition than it had been as the house was in need of updating before the disaster.  They had a restoration company handle the project, and dh spent a fair amount of time talking to the project manager.  The stories he told...

Rosy

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Re: Homeowner's Insurance - who needs it?
« Reply #7 on: June 09, 2017, 10:51:16 AM »
Homeowner's Insurance - who needs it?

Insurance is meant to lower or carry your risk for you. It makes sense to take on as much risk yourself as you feel comfortable with to save money on your insurance premiums.

Mr. MM might do without insurance, because he is in the construction business and will be able to rebuild at a considerably lower cost, a cost that he can easily absorb; friends in the business surely helps too.

Does it makes sense to seek partial insurance if available, when you look at your numbers? How much premium money will you save compared to the risk you are now taking on?
Is your stash strong enough to cover worst case medical expenses and worst case damage to your house at the same time?

I could see not carrying coverage at all, depending on the circumstances. Partial coverage sounds to me like opening up a can of worms.
 
We live in Hurricane Country so we prefer to carry coverage at the highest deductible that we can comfortably afford. Having said that, we dropped our insurance for roughly three years when the insurance company demanded we replace our roof. The roof guy said it was fine and he found nothing loose or deteriorated, but the ins. co. insisted on roof replacement based on their underwriting guidelines which required a new roof every 25 years.

The option would have been a cheap fly by night insurance company policy. A quick look at their Best rating, financials and time in business told me all I needed to know. Not enough cash reserves to pay out claims, if there is a problem.
So instead, we took a big chance for three years and went without insurance - we got lucky.


retired?

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Re: Homeowner's Insurance - who needs it?
« Reply #8 on: June 09, 2017, 12:39:25 PM »
Just investigating the idea.  I do agree that part of MMM's comfort level is likely from being close to construction and knowing a good bit himself, and not all financial.

I'm assuming all the non-financial benefits people have mentioned come with partial coverage as with full coverage.  May not be true.

No insurance and total loss would be a big deal.  But, I might choose less than full coverage if, say, my max loss were $80k and I saved $1k per year in premiums.

In other realms, firms partially hedge/insure their risk all the time, so it is not an unusual idea.  It would just change your "loss curve"

Just my experience, but USAA and others will ask 'what did you pay for it?' and then use that as the coverage level unless you point out land needs no coverage...nor pool value, etc.

Just wondering if others have approached it this way AND if any reputable firms allow this.  I do know some are more flexible in what they call "replacement value".

And, I agree that the idea is to pay for little risks and use insurance to cover large ones, but it's not quite like medical insurance where the sky is almost literally the limit and the loss from home is capped.

Papa bear

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Re: Homeowner's Insurance - who needs it?
« Reply #9 on: June 09, 2017, 05:09:03 PM »
What about the liability aspect?  I can rebuild a house, but I can't pay the medical bills of major injuries. 


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surfhb

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Re: Homeowner's Insurance - who needs it?
« Reply #10 on: June 09, 2017, 05:10:51 PM »
Incredible time waster

daverobev

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Re: Homeowner's Insurance - who needs it?
« Reply #11 on: June 09, 2017, 07:35:39 PM »
Big difference between covering a house's as-is value and its replacement (rebuild) cost.

For cheapie houses, I took cover based on my purchase price. Replacement would've been about 4x the amount of cover.

If a place burned down I'd just sell the lot and buy another at the same price, not rebuild. If there is a discrepancy like that, you could look into it.

I will certainly be looking into reducing the cover we have on this place if we pay it off before we move. It would cost much more to rebuild than it is worth, I think.

AnnaGrowsAMustache

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Re: Homeowner's Insurance - who needs it?
« Reply #12 on: June 09, 2017, 08:20:57 PM »
Do you have any kind of national earthquake cover linked to your home insurance? I'm from Christchurch in NZ. We had a huge and relatively unexpected quake 6 years ago that flattened the city. Something like 12,000 homes were pretty much lost in minutes. Thousands of people are still in disputes with insurance companies. A lot of people have learned the hard way that rebuilds cost way more than most people are insured for. Especially where the ground itself needs stabilisation work before a house can go back on it. Also, the government purchased "red zoned" land that could not be rebuilt upon, and that purchase was linked to insurance.

Even outside of quakes, self insurance seems a silly move to me. You'd realistically have to have more than the cost of rebuilding the house in a self insurance fund, and if you need it, you lose potentially all of it in rebuilding. A lifetime of insurance would cost far less in the long run.
« Last Edit: June 09, 2017, 08:23:48 PM by AnnaGrowsAMustache »

runewell

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Re: Homeowner's Insurance - who needs it?
« Reply #13 on: June 09, 2017, 09:15:10 PM »


Quote

We live in Hurricane Country so we prefer to carry coverage at the highest deductible that we can comfortably afford. Having said that, we dropped our insurance for roughly three years when the insurance company demanded we replace our roof. The roof guy said it was fine and he found nothing loose or deteriorated, but the ins. co. insisted on roof replacement based on their underwriting guidelines which required a new roof every 25 years.

The option would have been a cheap fly by night insurance company policy. A quick look at their Best rating, financials and time in business told me all I needed to know. Not enough cash reserves to pay out claims, if there is a problem.
So instead, we took a big chance for three years and went without insurance - we got lucky.

That was pretty dumb.  Older roofs are probably more susceptible to loss, and the insurance company is smart to dump someone who doesn't want to keep their house in good repair.  You may have found that the roof was in ok shape, but insurance companies try to set guidelines about what is and is not acceptable to get the rate you want.  Sort of like the ACA mess, let anyone into the insurance company and you will pay a lot of claim and not get the right rate.

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Re: Homeowner's Insurance - who needs it?
« Reply #14 on: June 10, 2017, 10:21:36 AM »
I have a 2% deductible, I know I could go higher but I don't think it would be to 20%.  As others have mentioned I insure for catastrophic loss and liability.  My friends aren't assholes but as already mentioned insurance companies and say the parents of the kid attending my kids backyard birthday party sure could be.  I also work in an industry where I meet a lot of assholes.

My $600/year + my umbrella makes me happy.  Oh yeah, that umbrella policy requires sufficient liability insurance on both my car and my house in order to get it.   

RobFIRE

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Re: Homeowner's Insurance - who needs it?
« Reply #15 on: June 11, 2017, 03:35:21 AM »
I will and do self-insure for losses where I know that my total liability has a known limit. So e.g. I don't insure my smartphone as I know the total cost is only its replacement cost. With my old car I was also happy to only have third party insurance ("collision" in the US I believe), as the value of my car was known and not very much.

I can understand that applying the same logic if you're MMM, so in round numbers have a house you could rebuild for $500,000 and are worth above $3,000,000, you would consider that you have a finite known loss and could afford it without having to change lifestyle etc. so the property insurance seems like a wasted cost. However, I would still be concerned about uncapped losses, what happens if you (or your child etc.) cause an accident at home leading to a fire that burns down your house and that fire spreads to your neighbours' houses and some of your neighbours are hospitalized: your liability there would be millions. You would be bankrupted. (I know that perhaps you may not be liable for a genuine accident, but who knows the line between accident/negligent)

So I would still have house insurance, but with a high excess (deductible) and probably not insuring the contents: so not for my own property, but for the potential uncapped liability for others.

HenryDavid

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Re: Homeowner's Insurance - who needs it?
« Reply #16 on: June 11, 2017, 05:05:22 AM »
Keep in mind that the amount you're insured for is a MAX amount--the company will "ensure" (so to speak" that you never receive that amount.
Having been in 2 situations where floods required big insurance-paid repairs, I can tell you they fight hard NOT to pay out what you think you are entitled to.
That said, we've actually come out head on premiums vs. repair costs over 15 years! So it's been a good deal.
Now mortgage free, we just go with true disaster-replacement insurance, plus a high deductible.

crispy

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Re: Homeowner's Insurance - who needs it?
« Reply #17 on: June 11, 2017, 06:26:22 AM »
I think it's nuts not to have it. My home owner's insurance is $600 a year...there is no reason not to have it.