The Money Mustache Community
General Discussion => Welcome and General Discussion => Topic started by: Fredster4 on October 06, 2016, 06:33:15 AM
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I am new and just chunking away at reading MMM legacy blog posts. In one he posts his expenses for the year and reveals he is paying $0 for home insurance, saying he has decided to "self insure" his home because of the low chance of anything happening and if it did, he could recover from it.
Seriously? The thought of doing this would make me very nervous.
His house is worth something in the vicinity of $400K, I think. How could this be "easily recovered from?"
I know only a portion of that value is the actual house, and the land and foundation would not be destroyed in a fire, but I'm curious if there are more of you out there, self insurers that it.
Sounds scary but maybe I just need to warm up to the idea.
Thanks in advance.
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MMM has a blog that generates 400k/year pretty much on autopilot at this point.
He could lose his house every 3 years without putting a dent in his savings.
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He already has way more than enough to live "forever" at his spending level and is still accumulating an outrageous amount like a madman. For him it makes little sense to have insurance.
But, for anyone else, I'd imagine it's ~$60/mo well spent - even though, yes, it's highly unlikely to begin with that you'll ever need it for anything truly catastrophic.
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I do wonder at which point he decided to self insure. When he retired he had a paid off house and a 600-800k NW. I wonder if he was self insuring at this point as well.
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I don't care how much money you have, saving $80 or $100 dollars a month to risk a 400k asset doesn't make sense.
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I don't care how much money you have, saving $80 or $100 dollars a month to risk a 400k asset doesn't make sense.
Insurance companies make a profit, which means that the $80-$100 is more than average cost of all of the claims, so in a strictly math/risk standpoint, it does make sense. It might just not make sense in your scenario.
Ricksun
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Homeowners insurance is not just about insuring the structure too though, it's about liability protection. Say mini-MMM has a friend over and they get into dad's power tools and someone loses a finger. Even if the kid's parents are "cool" MMM might still find himself sued by their insurance company. And suing a guy with a famous blog and who goes on the Internet and brags about how much money he has? Hoo-boy.
And doesn't MMM AirBnB his house when he's out of town? Without insurance (not sure what Airbnb provides?)? That would be a special kind of stupid. And all to save <$100/mo? From a guy who brags about his millions?
Yeah, okay.
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MMM has a blog that generates 400k/year pretty much on autopilot at this point.
He could lose his house every 3 years without putting a dent in his savings.
I'm sorry - on a blog with no advertising? How does this happen again?
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I don't care how much money you have, saving $80 or $100 dollars a month to risk a 400k asset doesn't make sense.
Insurance companies make a profit, which means that the $80-$100 is more than average cost of all of the claims, so in a strictly math/risk standpoint, it does make sense. It might just not make sense in your scenario.
Ricksun
They have a risk pool of X. You have a risk pool of 1. That's not an apples to apples comparison.
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MMM has a blog that generates 400k/year pretty much on autopilot at this point.
He could lose his house every 3 years without putting a dent in his savings.
I'm sorry - on a blog with no advertising? How does this happen again?
There is advertising on the blog and he gets referral fees from services he recommends. There are also ads on the forums, which gets hundreds of thousands of page views per day. This community may feel small at times, but it's really not. As I type this at 9:20 AM Eastern while a good chunk of the country is still asleep there are 500 people online.
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I also get the impression that he spends a lot more time at home or in the general vicinity than most of us do (building a studio, home schooling, blogging). In such a case, it is probably less risky that your house would completely burn down while you're not paying attention. He also has the skills to repair and rebuild it himself. He also paid it off early so has several decades to arbitrage the insurance savings vs. risk of loss. And he has plenty of income and net worth if he just wants to walk away from the smoking rubble and buy another house. He also isn't beholden to a job, so he could move whenever and wherever he wants, and spend his time rebuiding. For this and many more reasons, I would say that his situation is unique and not general advice that we should all apply willy nilly. I fall in the camp that the home insurance market works sufficiently well for me to keep my mortgage, shop around, and sleep well at night that I am neither being gouged to have it nor risking a significant, unmitigated financial setback if a hurricane, fire, tornado, hail, etc. damages my home.
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From a guy who brags about his millions?
I have not yet been exposed to this and it would turn me off if I had. I think one of his special gifts is always sounding like he's just a regular guy. (Except when I saw a picture of him towing a washing machine behind a bicycle. You would get thrown in a loony bin if you did that in my town, not to mention killed by a passing truck driver who didn't know how wide his trailer was.)
So if all that is true, why wouldn't he just give up the stoicism, buy a yacht and live like his money allows? All this mustachianism is not for people with lots of money, it's for those of us who will never be in the top 1% but still want to live a happy, free life without having to work until they're put in the grave. You know he's thought about it. Why else would he post the famous April fools post with the his and her's Teslas?
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It still doesn't make sense.
The cost of insurance is very minimal.
Everyone keeps saying he could just walk away, blah, blah ,blah.
House burns down....
Scenario 1.) He walks away....400k house gone, 400k to build a new house, 800k gone. Land value not factored here, but even it was and he sold the land, it would be a loss of the structure value.
Scenario 2.) Insurance rebuilds house for 130+% value. No loss. He still wants to walk away? Sells House for $520,000. Builds new house somewhere for 400k. 120k Profit. WIN.
Very specific examples, but Keep your insurance. Not sure what the thought process is here to get rid of such a minimal expense.
Not to mention the other liability issues people have brought up.
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It's very simple. If you own a TV worth $100 and have $1000 in savings, you could afford the loss of the TV, so could be comfortable not having it insured.
For MMM it's house rather than TV, and figures more like $400k and $2M or more. But it's the same point, you don't need insurance if you can afford the loss.
Most people clearly could not afford the loss of their house, so do need the insurance.
Secondly in MMM's case he likes DYI so could presumably rebuild his own house after e.g. destroyed by fire for rather less than its current value (I can't think of a realistic scenario whereby the land the house is on gets destroyed), so his maximum loss could be well less than $400k.
(The point about liability (e.g. fire in your house leads to fires in whole neighbourhood) could mean that you still have to have a basic level of insurance.)
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MMM has a blog that generates 400k/year pretty much on autopilot at this point.
He could lose his house every 3 years without putting a dent in his savings.
I'm sorry - on a blog with no advertising? How does this happen again?
There is advertising on the blog and he gets referral fees from services he recommends. There are also ads on the forums, which gets hundreds of thousands of page views per day. This community may feel small at times, but it's really not. As I type this at 9:20 AM Eastern while a good chunk of the country is still asleep there are 500 people online.
Suggested Reading which details one method of revenue for the website.
I Just Gave Up $4000 Per Month to Keep My Freedom of Speech (http://www.mrmoneymustache.com/2012/06/21/i-just-gave-up-4000-per-month-to-keep-my-freedom-of-speech/)
If you believe the websites that calculate an estimated worth of other websites, www.mrmoneymustache.com is worth around 2 million.
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Very specific examples, but Keep your insurance. Not sure what the thought process is here to get rid of such a minimal expense.
Not to mention the other liability issues people have brought up.
Probability x Loss = Expected loss
The probability of a total loss on your home is exceptionally low. When you pay your insurance premiums, year after year, you're essentially buying lottery tickets that the insurance company profits off of. Lottery tickets are not a good investment.
Insurance companies make profits and their risk models which determine your premiums are set up to ensure that they make money. The house always wins. On average (all customers x all premiums) - (all claims x average claim cost) you will lose money, and the insurance company will profit off of that money.
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It still doesn't make sense.
The cost of insurance is very minimal.
Everyone keeps saying he could just walk away, blah, blah ,blah.
House burns down....
Scenario 1.) He walks away....400k house gone, 400k to build a new house, 800k gone. Land value not factored here, but even it was and he sold the land, it would be a loss of the structure value.
Scenario 2.) Insurance rebuilds house for 130+% value. No loss. He still wants to walk away? Sells House for $520,000. Builds new house somewhere for 400k. 120k Profit. WIN.
Very specific examples, but Keep your insurance. Not sure what the thought process is here to get rid of such a minimal expense.
Not to mention the other liability issues people have brought up.
The most likely scenario by far is Scenario 3: The house does not burn down. No one loses a finger in the workshop and sues MMM. All those insurance premiums are just flushed down the toilet.
It's the reverse of the argument for gambling: If I keep putting in my nickels and pulling the lever, I might *not* have to pay out $100 someday.
People tend to focus on the worst-case scenario as if it has already happened, and plan accordingly. But that worst-case scenario is rare. Even a reduced worst-case scenario, like the garage burning down or a tree hitting the living room roof, is rare.
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But you have to weigh this all against the comparatively small cost of insurance. Gold-played homeowners insurance is typically ~$1000/yr for the average house, and that's before you start raising deductibles, etc. I Understand the low likelihood of Bad Things happening, but when you can insure against Bad Things for very little money, why would you not? It doesn't take a total catastrophe to eat up a decade or two of not paying insurance premiums.
I also think the liability portion here is being very clearly downplayed or ignored, especially given MMM's relative notoriety and broadcasting of his wealth.
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But you have to weigh this all against the comparatively small cost of insurance. Gold-played homeowners insurance is typically ~$1000/yr for the average house, and that's before you start raising deductibles, etc. I Understand the low likelihood of Bad Things happening, but when you can insure against Bad Things for very little money, why would you not? It doesn't take a total catastrophe to eat up a decade or two of not paying insurance premiums.
You can use the same argument to promote insuring your TV, and your toaster, and your cell phone, and all the pens in your desk drawer, and your calculator, and...
Assuming the probability of loss is low, and over the long term you're better off investing those insurance premiums, the only difference is scale. MMM happens to be wealthy enough that losing a house, to him, is probably like losing a car or TV to most people. Still makes insurance a shitty investment (from a mathematical/financial perspective).
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MMM has a blog that generates 400k/year pretty much on autopilot at this point.
He could lose his house every 3 years without putting a dent in his savings.
I'm sorry - on a blog with no advertising? How does this happen again?
There is advertising on the blog and he gets referral fees from services he recommends. There are also ads on the forums, which gets hundreds of thousands of page views per day. This community may feel small at times, but it's really not. As I type this at 9:20 AM Eastern while a good chunk of the country is still asleep there are 500 people online.
Suggested Reading which details one method of revenue for the website.
I Just Gave Up $4000 Per Month to Keep My Freedom of Speech (http://www.mrmoneymustache.com/2012/06/21/i-just-gave-up-4000-per-month-to-keep-my-freedom-of-speech/)
If you believe the websites that calculate an estimated worth of other websites, www.mrmoneymustache.com is worth around 2 million.
That's a very old post. He did state that the blog does rake 400k/year in the New Yorker profile published a couple months back.
Besides, website valuations are very hard to come up with and justify, one way or the other. Income is much more telling.
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But you have to weigh this all against the comparatively small cost of insurance. Gold-played homeowners insurance is typically ~$1000/yr for the average house, and that's before you start raising deductibles, etc. I Understand the low likelihood of Bad Things happening, but when you can insure against Bad Things for very little money, why would you not? It doesn't take a total catastrophe to eat up a decade or two of not paying insurance premiums.
You can use the same argument to promote insuring your TV, and your toaster, and your cell phone, and all the pens in your desk drawer, and your calculator, and...
Assuming the probability of loss is low, and over the long term you're better off investing those insurance premiums, the only difference is scale. MMM happens to be wealthy enough that losing a house, to him, is probably like losing a car or TV to most people. Still makes insurance a shitty investment (from a mathematical/financial perspective).
MMM is wealthy but not that wealthy. I think he's stated his NW is in the $4M ballpark. Losing a $400k house is still a substantial chunk of that, it's not like losing a TV. Which, BTW, my TVs are also insured...under my homeowners insurance.
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MMM is wealthy but not that wealthy. I think he's stated his NW is in the $4M ballpark. Losing a $400k house is still a substantial chunk of that, it's not like losing a TV. Which, BTW, my TVs are also insured...under my homeowners insurance.
Still a bad investment over the long term considering the low probability of loss occurring.
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MMM is wealthy but not that wealthy. I think he's stated his NW is in the $4M ballpark. Losing a $400k house is still a substantial chunk of that, it's not like losing a TV. Which, BTW, my TVs are also insured...under my homeowners insurance.
Still a bad investment over the long term considering the low probability of loss occurring.
Right up until it isn't. I know at least two people whose insurance companies have paid out 7 figures for things that would not be considered negligence.
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Right up until it isn't. I know at least two people whose insurance companies have paid out 7 figures for things that would not be considered negligence.
The lottery is a bad investment... right up until it isn't
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MMM has a blog that generates 400k/year pretty much on autopilot at this point.
He could lose his house every 3 years without putting a dent in his savings.
I'm sorry - on a blog with no advertising? How does this happen again?
There is advertising on the blog and he gets referral fees from services he recommends. There are also ads on the forums, which gets hundreds of thousands of page views per day. This community may feel small at times, but it's really not. As I type this at 9:20 AM Eastern while a good chunk of the country is still asleep there are 500 people online.
Suggested Reading which details one method of revenue for the website.
I Just Gave Up $4000 Per Month to Keep My Freedom of Speech (http://www.mrmoneymustache.com/2012/06/21/i-just-gave-up-4000-per-month-to-keep-my-freedom-of-speech/)
If you believe the websites that calculate an estimated worth of other websites, www.mrmoneymustache.com is worth around 2 million.
That's a very old post. He did state that the blog does rake 400k/year in the New Yorker profile published a couple months back.
Besides, website valuations are very hard to come up with and justify, one way or the other. Income is much more telling.
Yea, it's an old post. It was more of a response to the person questioning how he was making money with minimal advertising. This post shows at one point he was making 48,000/yr from referrals from one credit card. Just showing that the CC referral was one source. There are other credit cards, other ads, other referrals etc.
And 2mm would be a rough valuation for 400k in income, so that website isn't to far off.
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But you have to weigh this all against the comparatively small cost of insurance. Gold-played homeowners insurance is typically ~$1000/yr for the average house, and that's before you start raising deductibles, etc. I Understand the low likelihood of Bad Things happening, but when you can insure against Bad Things for very little money, why would you not? It doesn't take a total catastrophe to eat up a decade or two of not paying insurance premiums.
--snip--
Still makes insurance a shitty investment (from a mathematical/financial perspective).
This is a fascinating statement. Never thought of insurance as an investment before.
If you want to optimize everything from a financial perspective, surely you would:
1. Have no emergency fund
2. Keep every spare cent invested in 100% stocks (or 100% emerging markets small cap stocks, or 100% AAPL if you wanted to get really ridiculous)
3. Have no insurance of any kind
And do lots of other things that don't clearly maximize the upside.
But many people choose to trade some of that upside:
1. By having a reasonable amount of insurance
2. By having an emergency fund
3. By having an asset allocation that includes other categories besides stocks
For some protection against the bad things that happen in life, which is not just limited to a total loss on your house.
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I feel like a lot of people here are trying to say math things without actually doing any math. And comparing home insurance to the lotto is dumb. If anyone really believes that insurance is like the lotto, well then I guess we should all just stop paying insurance because we're all morons handing money to billionaires.
Granted that Colorado is a pretty safe state for homes, so I don't feel like there is a huge potential for loss. But there are a lot of big ticket items that can be covered. (But hopefully MMM has personal liability insurance to protect his investments and other assets.)
But let's make some extremes here. If home insurance for a $400k house was $1/yr. Everyone would be saying that MMM is an idiot for not taking that deal. It doesn't even matter if he can self-insure or not, a $1/yr premium is a smokin deal that would pay itself off likely 1000's of times over. So it's not that once you have enough money you just shouldn't bother. You should evaluate for yourself what is worth it, and what isn't.
I don't take C&C insurance on my car because the additional cost of about $300-400 per year pays itself off in 4-5 years, and since it would not be financially devestating to my bottom line to take that hit, I feel comfortable taking that bet. So if Home insurance were $20k/yr, I think we would all agree that the odds of that paying off are extremely low and is not worth it.
And yes a lot of insurance companies make a lot of money. There's also a lot that don't make money, especially after a big disaster. Which is why insurance companies purchase reinsurance, because there are times when they don't get expected loss right. Actuary tables are not perfect; both parties in the exchange are taking a bet.
Now I'm going to guess that home insurance is going to cost about $1500/yr for him. And let's just do some expected loss calculations on just total loss of home (so it's not the full benefit of the insurance, but it's easier to examine it in isolation)
$400k * (chance of total loss) = $1500
So here we're estimating the chance of total home loss to be about .3%. Or in other words, you're paying .3% of the value of your home to protect the other 99.7% each year.
Since MMM's only likely source of loss is Fire (maybe hail, but that wouldn't cause total loss). I looked up the Fire statistics. There were 365,500 house fires last year and 124.6 million homes. That means about .29% of homes each year catch on fire. Seeing as home insurance covers more than just house fires, if his home insurance is $1500/yr, I would definitely say he is making a bad deal, and being on the wrong side of that deal is a huge loss. MMM's wealth status or not, you take this deal.
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Just because he says he doesn't use insurance doesn't mean it's true. He turned frugality - which is as old as the bible - plus the 4% rule into a $400k income stream. He has to keep the story going and figure out how to keep everyone believing he is only spending $25k per year. So he tells everyone he saves a few thousand per year by self insuring. But that doesn't mean it's true.
I like MMM and the forums but I don't believe everything he writes is true - not by a long shot. I'm sure he has a homeowner's policy (for the liability coverage) and an umbrella policy. As others have noted he is a wealthy public figure so he needs to protect his assets from lawsuits.
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If you want to optimize everything from a financial perspective, surely you would:
1. Have no emergency fund
2. Keep every spare cent invested in 100% stocks (or 100% emerging markets small cap stocks, or 100% AAPL if you wanted to get really ridiculous)
3. Have no insurance of any kind
I do two out of three of those...
The key to remember, though, is that you're actually trying to maximize risk-adjusted return. If you can afford not to hedge against a particular risk, then not hedging it will tend to maximize return. However, if the risk can wipe you out (or at least, cause you significant problems) then it becomes worth hedging against it.
For example:
- I can do without an emergency fund because my high cash flow (relative to spending), large available credit, parents who could bail me out in an emergency, and ability to withdraw Roth IRA principal can all compensate for it.
- I am 100% stocks because my time horizon is very long and thus I don't consider "volatility" to be a risk. (However, I'm open to the idea of adding a small amount of bonds if I could be convinced that they could increase overall returns, or hedge against some other kind of risk -- e.g. sequence of returns risk -- that I might care about.)
- I do not carry collision or comprehensive insurance on my cars, because they're only worth a couple thousand dollars each and I could afford to replace them out-of-pocket. However, I do carry insurance on my house because I can't yet afford to replace that out-of-pocket (and because the mortgage requires it), and I carry very good liability insurance on both my cars and my home, including an umbrella policy, because that's the kind of risk that could wipe me out no matter how high my net worth is.
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Just because he says he doesn't use insurance doesn't mean it's true. He turned frugality - which is as old as the bible - plus the 4% rule into a $400k income stream. He has to keep the story going and figure out how to keep everyone believing he is only spending $25k per year. So he tells everyone he saves a few thousand per year by self insuring. But that doesn't mean it's true.
I like MMM and the forums but I don't believe everything he writes is true - not by a long shot. I'm sure he has a homeowner's policy (for the liability coverage) and an umbrella policy. As others have noted he is a wealthy public figure so he needs to protect his assets from lawsuits.
I think we should demand to see his tax returns! :)
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If you want to optimize everything from a financial perspective, surely you would:
1. Have no emergency fund
2. Keep every spare cent invested in 100% stocks (or 100% emerging markets small cap stocks, or 100% AAPL if you wanted to get really ridiculous)
3. Have no insurance of any kind
I do two out of three of those...
The key to remember, though, is that you're actually trying to maximize risk-adjusted return. If you can afford not to hedge against a particular risk, then not hedging it will tend to maximize return. However, if the risk can wipe you out (or at least, cause you significant problems) then it becomes worth hedging against it.
For example:
- I can do without an emergency fund because my high cash flow (relative to spending), large available credit, parents who could bail me out in an emergency, and ability to withdraw Roth IRA principal can all compensate for it.
- I am 100% stocks because my time horizon is very long and thus I don't consider "volatility" to be a risk. (However, I'm open to the idea of adding a small amount of bonds if I could be convinced that they could increase overall returns, or hedge against some other kind of risk -- e.g. sequence of returns risk -- that I might care about.)
- I do not carry collision or comprehensive insurance on my cars, because they're only worth a couple thousand dollars each and I could afford to replace them out-of-pocket. However, I do carry insurance on my house because I can't yet afford to replace that out-of-pocket (and because the mortgage requires it), and I carry very good liability insurance on both my cars and my home, including an umbrella policy, because that's the kind of risk that could wipe me out no matter how high my net worth is.
Fair enough Jack - nice perspective. I had a similar attitude to you when I was younger as well.
I will refrain from asking whether you think you're lucky - I'm enjoying the other thread too much :)
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I don't carry collision insurance on my car, because the car is cheap enough relative to my net worth that a total loss wouldn't really set me back that much. I can't say that about my house. However if I had 10 times as much money as I do now I could totally see myself making the choice not to insure against that loss. However I can't see myself dropping the liability piece no matter how my net worth grows. We have too many people suing each other in this country and the payout can potentially be unboundedly high.
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I guess it is like having your money in the stock market, nothing is risk free.
If your house is valued about at your net worth or less you could go bust through just one event (i.e. major sequence risk), but if it is only 10% of your net worth you can take the hit should it happen. Nobody here insures their VTSAX do they? What would you do it that went down 20% tomorrow?
I never never bought extended warranties, and tend to keep higher than average deductibles. I am slowly coming around the the idea that car sized things can be safely self-insured for their value (liability is a different story). If I had my retirement 150% funded I could see myself only having an umbrella policy on the house. I would then not have to worry about someone else telling me when to replace my roof, or when to trim back trees touching my house, etc.
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Scenario 1.) He walks away....400k house gone, 400k to build a new house, 800k gone. Land value not factored here, but even it was and he sold the land, it would be a loss of the structure value.
That's.... not how that works.
The only loss is the $400K house.
After spending $400K to build or buy a new house, you still have a house worth $400K.
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I guess I don't see how one could be so rich that they can reasonably self insure their house but also in a position where NOT paying the insurance could have a meaningful impact on your finances. I don't care how rich you are, paying out of pocket for something that costs hundreds of thousands stings when it could have been avoided for a grand a year. For a car, I get it, $1k/yr to insure a $5k car means you are in the red after only 5 years. But a house, you could pay $1k/yr for 50 years and stil come out ahead after even a non-catastrophic claim of the right kind.
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Homeowners insurance is not just about insuring the structure too though, it's about liability protection. Say mini-MMM has a friend over and they get into dad's power tools and someone loses a finger. Even if the kid's parents are "cool" MMM might still find himself sued by their insurance company. And suing a guy with a famous blog and who goes on the Internet and brags about how much money he has? Hoo-boy.
And doesn't MMM AirBnB his house when he's out of town? Without insurance (not sure what Airbnb provides?)? That would be a special kind of stupid. And all to save <$100/mo? From a guy who brags about his millions?
Yeah, okay.
What is the most he could potentially lose with liability? If he can cover the max liability without any serious hardship, then it doesn't make sense just to make the insurance company rich. Same principle applies whether it's a $100 phone or a potential $2M lawsuit.
As for just the value of the house itself, it makes no sense at all for him to pay an insurance company for that. He could buy his house again at least 5 times over.
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Homeowners insurance is not just about insuring the structure too though, it's about liability protection. Say mini-MMM has a friend over and they get into dad's power tools and someone loses a finger. Even if the kid's parents are "cool" MMM might still find himself sued by their insurance company. And suing a guy with a famous blog and who goes on the Internet and brags about how much money he has? Hoo-boy.
And doesn't MMM AirBnB his house when he's out of town? Without insurance (not sure what Airbnb provides?)? That would be a special kind of stupid. And all to save <$100/mo? From a guy who brags about his millions?
Yeah, okay.
People don't sue those who are judgment proof (have no money) that is true, because it's a waste of resources to squeeze that rock - you lose more in attorney's fees. Yes, he has more money to pay for a judgment against him than the average person. But you don't get a large judgment simply because you are rich. You still have to prove things such as liability & harm. Someone is severely disabled on his property or dies and it's his fault, yes, it could be a large judgment. (Frankly, many people who are insured likely don't have enough insurance to cover these types of judgments. Do you carry more than $2 million in insurance? And many people may not read their policy to know what's excluded. If you drink/serve alcohol, you may not be covered at all in those situations.)
But very rarely do you even encounter these severely disabling situations. An unshoveled sidewalk, a crack on your driveway someone trips over, or even a finger lost in an power tool is just not that expensive. (Only one of the cited cases had an award of over $1 million, with most being reduced for the plaintiff - the operator's - error http://www.newyorkinjurycasesblog.com/2009/06/articles/amputation-injuries/finger-amputation-cases-pain-and-suffering-awards-range-from-85000-to-2000000/)
If you have a pool in your backyard, I'd recommend carrying higher insurance though.
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Homeowners insurance is not just about insuring the structure too though, it's about liability protection. Say mini-MMM has a friend over and they get into dad's power tools and someone loses a finger. Even if the kid's parents are "cool" MMM might still find himself sued by their insurance company. And suing a guy with a famous blog and who goes on the Internet and brags about how much money he has? Hoo-boy.
And doesn't MMM AirBnB his house when he's out of town? Without insurance (not sure what Airbnb provides?)? That would be a special kind of stupid. And all to save <$100/mo? From a guy who brags about his millions?
Yeah, okay.
AirBnB provides $1M for covered liabilities. (https://www.airbnb.com/host-protection-insurance)
I got $1M in personal umbrella when I started doing real estate, for less than $20/mo. I think it's $24 and change now.
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Insurance is a bet against yourself.
Insurance companies are pure statisticians. They play the numbers in the quest for profit. Don't buy any form of insurance unless you truly cannot afford the loss/risk in question.
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I guess I don't see how one could be so rich that they can reasonably self insure their house but also in a position where NOT paying the insurance could have a meaningful impact on your finances.
In other words, you're arguing that the decision to forego insurance falls below the point of diminishing returns. I think that's a reasonably persuasive argument; however, for MMM himself it would violate the principle of constant optimization (http://www.mrmoneymustache.com/2013/05/15/the-principle-of-constant-optimization/), so I can see why he would act differently.
Insurance is a bet against yourself.
Insurance companies are pure statisticians. They play the numbers in the quest for profit. Don't buy any form of insurance unless you truly cannot afford the loss/risk in question.
Or unless you have some (good!) reason to believe you know better than the actuaries.
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Since MMM's only likely source of loss is Fire (maybe hail, but that wouldn't cause total loss). I looked up the Fire statistics. There were 365,500 house fires last year and 124.6 million homes. That means about .29% of homes each year catch on fire. Seeing as home insurance covers more than just house fires, if his home insurance is $1500/yr, I would definitely say he is making a bad deal, and being on the wrong side of that deal is a huge loss. MMM's wealth status or not, you take this deal.
I don't know for sure, but I would imagine that the majority of those house fires did not cause a total loss. Most house fires IIRC are caused by burning candles left unattended, or people smoking in bed and falling asleep. With fire stations nearby (I can't recall if MMM lives in an urban setting, but I think he does) and neighbors, the house is only going to be on fire for a few minutes and cause a few thousand to maybe $20K in damage, part of which would be absorbed by the high deductible that MMM would carry if he carried insurance at all. I suspect total losses due to fire are more typical in mobile home parks or in very rural areas with low fire department coverage and very slow response times.
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While one person may argue against insurance, they may argue for 3% WR even though that has never been provably required in the last 100 years. Home losses tangibly occur and can even be considered an "expense" based on statistical possibility of cost.
Safety is an Expensive Illusion is an excellent post. But there is a behavioral component here that some people can't get over. It's fair for individuals to address it the way they want, even if they fully recognize that it isn't financially optimal. (But it's best to be honest and recognize when you are paying for safety.)
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There is a ton of stuff you can do to mitigate your risk of a fire in the home.
1. Don't have extra stuff in the house. Mustachianism would tend to support this, it depends a bit on how you implement MMM's thermal mass idea. But it also includes stuff like hygiene, taking out the trash in a timely manner, and the nature of stuff you don't think of as extra (check out my collection of vintage explosives!).
2. Do not use substandard electrical equipment. This is a risk factor as I see it with mustachiansim, because of welcoming used stuff. You really don't know the full history of that used lamp you bought. This is also a risk factor because of the DIY mentality. It is very easy to do electrical work correctly, it is very easy to do it improperly. The adoption of the national electric code overwhelmingly reduced the amount of structural fires in the US. It is the single greatest improvement to reducing fires. Poorly installed/maintained electrical installations are why we did not see a significant reduction in fire when we went from using open flames for lighting to light bulbs.
3. Smoke detectors in good working order installed in appropriate places reduce the damage you get from a fire.
4. Home fire sprinkler systems reduce the damage you get from a fire.
5. Live in a deed restricted area with good code enforcement. You can do everything right, and if every house in the neighborhood has those pretty wooden shingles the whole neighborhood burns down.
6. Good garage upkeep with respect to storage and cleanup of liquids and rags and solvents and such.
All that being true, thousands of times a year someone's house burns to the ground despite all equipment being in good working order, no history of failures with the equipment, no sign of neglect by the owner, and no failure of the fire department to respond in a timely manner.
The best of appliances can fail suddenly. The most diligent person occasionally leaves a stove on, and almost none of us clears out our dryer vents often enough. Then there's the serial firestarters and the everpresent natural phenomenon of lightning.
I had a smoke detector catch fire once. The actual alarm went into alarm after setting itself on fire.
I wouldn't advise not having fire insurance, and if you wanted to optimize the cost I would suggest residential fire sprinklers and a monitored alarm system as a way to reduce your insurance premium, but if someone was inclined towards diligent maintenance of these aspects of their homestead (and MMM strikes me as an "organizes the garage before, during, and after every project" type) then it is probably not that huge a risk to take.
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I had a smoke detector catch fire once. The actual alarm went into alarm after setting itself on fire.
This is the funniest thing I've heard all day.
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Just popping in to proclaim my jealousy of those of you with $60-$80-$100/mo. insurance policies. Here in hurricane alley, I pay ~$3200/yr for basic + $750/yr for flood, which comes to around $330/mo. This is on a ~$200k house. Yes, I've shopped around 😕 (But it may be time to try again)
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Just popping in to proclaim my jealousy of those of you with $60-$80-$100/mo. insurance policies. Here in hurricane alley, I pay ~$3200/yr for basic + $750/yr for flood, which comes to around $330/mo. This is on a ~$200k house. Yes, I've shopped around 😕 (But it may be time to try again)
I'll trade your insurance + property tax bill for mine ;)
Hint: $1k/yr insurance and close to $9k/yr property tax
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Just popping in to proclaim my jealousy of those of you with $60-$80-$100/mo. insurance policies. Here in hurricane alley, I pay ~$3200/yr for basic + $750/yr for flood, which comes to around $330/mo. This is on a ~$200k house. Yes, I've shopped around 😕 (But it may be time to try again)
Why should you be jealous of us? I'm willing to bet that the risk differential is even higher than the cost differential, so we're subsidizing you. (And the subsidy gets even bigger once you consider that our tax dollars also pay for FEMA!)
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author=Winston link=topic=62387.msg1255816#msg1255816 date=1475790149]
Just popping in to proclaim my jealousy of those of you with $60-$80-$100/mo. insurance policies. Here in hurricane alley, I pay ~$3200/yr for basic + $750/yr for flood, which comes to around $330/mo. This is on a ~$200k house. Yes, I've shopped around 😕 (But it may be time to try again)
I'll trade your insurance + property tax bill for mine ;)
Hint: $1k/yr insurance and close to $9k/yr property tax
Property taxes are about $4500/yr. so you'd save a little, but not as much as you might think. Besides, at least property taxes go towards useful things in your community. Insurance payments go to line the pockets of the racketeers... err, I mean insurance companies.
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Just popping in to proclaim my jealousy of those of you with $60-$80-$100/mo. insurance policies. Here in hurricane alley, I pay ~$3200/yr for basic + $750/yr for flood, which comes to around $330/mo. This is on a ~$200k house. Yes, I've shopped around 😕 (But it may be time to try again)
Why should you be jealous of us? I'm willing to bet that the risk differential is even higher than the cost differential, so we're subsidizing you. (And the subsidy gets even bigger once you consider that our tax dollars also pay for FEMA!)
Oh thank you, good sir, for subsidizing me!
*grovel grovel*
*licks boot*
You wanna swap insurance bills? Didn't think so. That's why I'm jealous. Even if you are subsidizing me*, it's still better to pay a fraction of what I pay. It's not like I get some extra-special experience living here in Satan's anus.
*unsubstantiated
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author=Winston link=topic=62387.msg1255816#msg1255816 date=1475790149]
Just popping in to proclaim my jealousy of those of you with $60-$80-$100/mo. insurance policies. Here in hurricane alley, I pay ~$3200/yr for basic + $750/yr for flood, which comes to around $330/mo. This is on a ~$200k house. Yes, I've shopped around 😕 (But it may be time to try again)
I'll trade your insurance + property tax bill for mine ;)
Hint: $1k/yr insurance and close to $9k/yr property tax
Property taxes are about $4500/yr. so you'd save a little, but not as much as you might think. Besides, at least property taxes go towards useful things in your community. Insurance payments go to line the pockets of the racketeers... err, I mean insurance companies.
I'm in IL, so I'm not convinced my tax dollars are going to anything productive.
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You wanna swap insurance bills? Didn't think so. That's why I'm jealous. Even if you are subsidizing me*, it's still better to pay a fraction of what I pay. It's not like I get some extra-special experience living here in Satan's anus.
*unsubstantiated
I hope you are getting something out of living in Houston, whether it's higher wages or something else. If you're going to pay thousands of dollars extra for the privilege of living somewhere, Florida is a a lot more appealing. :)
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You wanna swap insurance bills? Didn't think so. That's why I'm jealous. Even if you are subsidizing me*, it's still better to pay a fraction of what I pay. It's not like I get some extra-special experience living here in Satan's anus.
*unsubstantiated
I hope you are getting something out of living in Houston, whether it's higher wages or something else. If you're going to pay thousands of dollars extra for the privilege of living somewhere, Florida is a a lot more appealing. :)
Definitely. It's the main hub of my industry, and the food and culture are great. It's just plopped onto some of the most climatically, topographically miserable acreage in North America. Basically it's a double gut-punch from an insurance standpoint. The reasons I hate it here are the same reasons that the insurance is high.
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The only truly wealthy people I know are the top 2-3 earners at my company. Own multiple houses, private jet, blah blah. None of them insure their homes for the reasons already mentioned. It's such a small amount of money for them that they don't bother, plus they can take that same money and instead invest it in businesses, commercial real estate, etc.
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The only truly wealthy people I know are the top 2-3 earners at my company. Own multiple houses, private jet, blah blah. None of them insure their homes for the reasons already mentioned. It's such a small amount of money for them that they don't bother, plus they can take that same money and instead invest it in businesses, commercial real estate, etc.
Again, I find it hard to believe that people who can afford to rebuild a house because it is a meaningless amount of money would find the $1-3k of insurance money meaningful to invest in some other venture.
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The only truly wealthy people I know are the top 2-3 earners at my company. Own multiple houses, private jet, blah blah. None of them insure their homes for the reasons already mentioned. It's such a small amount of money for them that they don't bother, plus they can take that same money and instead invest it in businesses, commercial real estate, etc.
Again, I find it hard to believe that people who can afford to rebuild a house because it is a meaningless amount of money would find the $1-3k of insurance money meaningful to invest in some other venture.
It's not about whether the premiums would make a significant difference in your investments, it's about whether the cost of loss is high enough to accept the negative expected value that insurance offers.
As an example, suppose I offered to sell you an elephant stampede insurance policy for $1/year. It would pay for any expenses you incur as a result of an elephant stampede within 1,000 miles of your home in Illinois. Surely, $1 isn't going to make a meaningful difference in your investment strategy. Do you buy the insurance? Probably not, because an elephant stampede is unlikely enough that the insurance is overpriced even at $1.
Scale up your net worth a thousand times and you can see how the possibility of a home fire just isn't expensive or likely enough to be worth paying a company to insure against. If it happens, you'll pay for a new one and get on with your life.
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Fine, but let's not pretend investing the token amount of money saved has anything to do with it.
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Fine, but let's not pretend investing the token amount of money saved has anything to do with it.
I think it's a combination of 1) it's not necessarily a token amount of money. How much does it cost to insure a $5M home in the Keys? I'm truly asking, I don't know. 2) For some people - greed.
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I agree with the liability argument. F the material stuff. I'm not risk averse enough at this point to go without insurance. But I wonder how/if that could all change if I had a larger net worth?
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I am new and just chunking away at reading MMM legacy blog posts. In one he posts his expenses for the year and reveals he is paying $0 for home insurance, saying he has decided to "self insure" his home because of the low chance of anything happening and if it did, he could recover from it.
You may have been looking at this MMM blog post about his 2015 spending:
http://www.mrmoneymustache.com/2016/04/01/mmm-spending-2015/ (http://www.mrmoneymustache.com/2016/04/01/mmm-spending-2015/)
But if you look at two of his replies to comments on that post, he says that he is planning to get insurance for his new home -- he just hadn't gotten around to it.
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Just popping in to proclaim my jealousy of those of you with $60-$80-$100/mo. insurance policies. Here in hurricane alley, I pay ~$3200/yr for basic + $750/yr for flood, which comes to around $330/mo. This is on a ~$200k house. Yes, I've shopped around 😕 (But it may be time to try again)
Why should you be jealous of us? I'm willing to bet that the risk differential is even higher than the cost differential, so we're subsidizing you. (And the subsidy gets even bigger once you consider that our tax dollars also pay for FEMA!)
Oh thank you, good sir, for subsidizing me!
*grovel grovel*
*licks boot*
You wanna swap insurance bills? Didn't think so. That's why I'm jealous. Even if you are subsidizing me*, it's still better to pay a fraction of what I pay. It's not like I get some extra-special experience living here in Satan's anus.
*unsubstantiated
Hmm... you seem unjustifiably upset by facts.
I'm not asking you to thank me for the subsidy, but I would appreciate it if you quit complaining that it isn't even higher!
(By the way: yes, you do get some "extra-special experience" living in Houston: unlike me, you don't have to travel 250+ miles to get to a beach!)
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Insurance is a bet against yourself.
Insurance companies are pure statisticians. They play the numbers in the quest for profit. Don't buy any form of insurance unless you truly cannot afford the loss/risk in question.
This is correct. Although I would change "truly cannot afford" to "would cause a severe financial hardship". I could technically afford losing my home, but it would cause a huge dent to my NW. The $700/year I pay in insurance makes sense. However, I don't own earthquake insurance because the $2800/year in premiums does not justify potential loss.
Same logic applies to all insurance, including health insurance. Although here the risk is greater because almost all of us, including MMM, could be wiped out financially with a major health issue since there is no ceiling to (the exorbitant healthcare) costs.
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You wanna swap insurance bills? Didn't think so. That's why I'm jealous. Even if you are subsidizing me*, it's still better to pay a fraction of what I pay. It's not like I get some extra-special experience living here in Satan's anus.
*unsubstantiated
I hope you are getting something out of living in Houston, whether it's higher wages or something else. If you're going to pay thousands of dollars extra for the privilege of living somewhere, Florida is a a lot more appealing. :)
Definitely. It's the main hub of my industry, and the food and culture are great. It's just plopped onto some of the most climatically, topographically miserable acreage in North America. Basically it's a double gut-punch from an insurance standpoint. The reasons I hate it here are the same reasons that the insurance is high.
It is time to shop around again. There are now some better alternatives to TWIA. When I first moved down where windstorm was mandatory TWIA was all there was but no more! I just found about this as well, it's been long enough since IKE that some other insurers are now offering coverage again, so you can potentially save a couple thousand (I did).
I know we're not strictly speaking supposed to advertise, but http://www.turrentineinsuranceagency.com/ is who I was introduced to. Thousands.
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You wanna swap insurance bills? Didn't think so. That's why I'm jealous. Even if you are subsidizing me*, it's still better to pay a fraction of what I pay. It's not like I get some extra-special experience living here in Satan's anus.
*unsubstantiated
I hope you are getting something out of living in Houston, whether it's higher wages or something else. If you're going to pay thousands of dollars extra for the privilege of living somewhere, Florida is a a lot more appealing. :)
Definitely. It's the main hub of my industry, and the food and culture are great. It's just plopped onto some of the most climatically, topographically miserable acreage in North America. Basically it's a double gut-punch from an insurance standpoint. The reasons I hate it here are the same reasons that the insurance is high.
It is time to shop around again. There are now some better alternatives to TWIA. When I first moved down where windstorm was mandatory TWIA was all there was but no more! I just found about this as well, it's been long enough since IKE that some other insurers are now offering coverage again, so you can potentially save a couple thousand (I did).
I know we're not strictly speaking supposed to advertise, but http://www.turrentineinsuranceagency.com/ is who I was introduced to. Thousands.
I live in Houston, have a more expensive house, and have not paid more than $1,900 since 2011. Currently at $1600 and have been as low as $1337. I use an insurance broker (TexansInsure.com) and usually have them shop around a bit. There's also a deluge of offers in the mail that I can pursue independently during the month of renewal. Sounds like you have an easy budget item to whittle down there Winston!
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Since MMM's only likely source of loss is Fire (maybe hail, but that wouldn't cause total loss). I looked up the Fire statistics. There were 365,500 house fires last year and 124.6 million homes. That means about .29% of homes each year catch on fire. Seeing as home insurance covers more than just house fires, if his home insurance is $1500/yr, I would definitely say he is making a bad deal, and being on the wrong side of that deal is a huge loss. MMM's wealth status or not, you take this deal.
I don't know for sure, but I would imagine that the majority of those house fires did not cause a total loss.
Statistics in the wrong hands can be a dangerous thing. It's pretty clear the math supports not paying insurance in many cases; even MustacheMath should show that...
$1K a year is roughly 4% of MMM's stated yearly spending*. That's not an inconsiderable amount of budgeted expenses to cut out to avoid a situation that is mathematically unlikely to happen, and will have almost no effect upon his happiness or financial situation should it occur. *(Of course he spends more than this each year, but we can pretend)
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I don't care how much money you have, saving $80 or $100 dollars a month to risk a 400k asset doesn't make sense.
It seems that way. But they make money from it. So self insurance probably makes sense if you can afford it, and I assume he can.
I've thought about self insuring for a couple of years. Just never pulled the trigger.
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I do wonder at which point he decided to self insure. When he retired he had a paid off house and a 600-800k NW. I wonder if he was self insuring at this point as well.
You decide to self-insure when you can cover your losses. If you can't do that, then you still need to buy insurance. That is pretty much the way insurance is supposed to work. Even if someone can cover their losses, many still buy insurance because it makes them feel better, but makes very little financial sense.
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Fine, but let's not pretend investing the token amount of money saved has anything to do with it.
I think it's a combination of 1) it's not necessarily a token amount of money. How much does it cost to insure a $5M home in the Keys? I'm truly asking, I don't know. 2) For some people - greed.
It's also the hassle of dealing with the insurance. Am I getting a good deal? Oops, gotta make those payments, file the documents, et cetera. every year.
If the house DOES burn down, I will have to spend hundreds and hundreds of hours dealing with the insurance company to get it rebuilt the way I want.
If I'm grossly wealthy - fuck that. Ignore insurance. If it burns down, I rebuild it how I want, no fighting with insurance dweebs. I might do that anyway, like you would buy a new pair of pants.
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I'm really honestly surprised by everyone saying that it makes sense to self insure as long as you have enough money because insurers are greedy little buggers that just make momey off of premiums. Insurance profits run between 5-20%. On a policy of 1500 per year only 75-300 of that is profit for companies. If you have insurance through USAA, your premiums don't even really go towards profits, they all go towards claims. So that money you pay is not empty profit. It is honest to goodness real benefit. The game you play is if you think it is worth it. I know all the people in Jacksonville, FL think it was worth it. Their homes get hammered about once a decade.
You can pay home insurance your whole life and never come close to approaching the value of your home. While not all insurance males sense, home insurance is a typical good buy.
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I'm really honestly surprised by everyone saying that it makes sense to self insure as long as you have enough money because insurers are greedy little buggers that just make momey off of premiums. Insurance profits run between 5-20%. On a policy of 1500 per year only 75-300 of that is profit for companies. If you have insurance through USAA, your premiums don't even really go towards profits, they all go towards claims. So that money you pay is not empty profit. It is honest to goodness real benefit. The game you play is if you think it is worth it. I know all the people in Jacksonville, FL think it was worth it. Their homes get hammered about once a decade.
You can pay home insurance your whole life and never come close to approaching the value of your home. While not all insurance males sense, home insurance is a typical good buy.
Even if insurance companies make $0 profit there are still a ton of overhead costs which your premium is paying for, such as salaries of the call centers, website infrastructure, claims verifications, etc.
Anecdotally, USAA is a funny example to me because I recently switched auto/homeowners away from them and saved an absurd percentage a year.
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I hope that works out for you. USAA pays out claims faster than anyone else I've seen, they return extra premiums at the end of each year, and pay out more than other insurers. It still doesn't negate the fact that home owner's is cheap, and even 400k should be considered significant to a man worth 4mil.
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I'm really honestly surprised by everyone saying that it makes sense to self insure as long as you have enough money because insurers are greedy little buggers that just make momey off of premiums. Insurance profits run between 5-20%. On a policy of 1500 per year only 75-300 of that is profit for companies. If you have insurance through USAA, your premiums don't even really go towards profits, they all go towards claims. So that money you pay is not empty profit. It is honest to goodness real benefit. The game you play is if you think it is worth it. I know all the people in Jacksonville, FL think it was worth it. Their homes get hammered about once a decade.
You can pay home insurance your whole life and never come close to approaching the value of your home. While not all insurance males sense, home insurance is a typical good buy.
Even if insurance companies make $0 profit there are still a ton of overhead costs which your premium is paying for, such as salaries of the call centers, website infrastructure, claims verifications, etc.
Anecdotally, USAA is a funny example to me because I recently switched auto/homeowners away from them and saved an absurd percentage a year.
(emphasis mine)
This is a concern that is conveniently ignored by the health insurance mouthpieces. Look, 80+% of your premium goes to handling claim! We're not the bad guys, we swear!
Yeah right. except there is still a huge incentive to keep everything as bloated as possible to make the remaining 20% come from the largest pie possible. Property insurance, in comparison, is pretty good at keeping costs under control.
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Ouch - house insurance is expensive in the USA. Here in the UK it's routinely under £200/annum inc legal cover etc. for a £400k house and £50k of contents.
We are quite short on hurricanes and earthquakes though and suing each other still hasn't caught on as a routine pastime ;-)
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I'm onboard with the triumverate of insurance policies: auto, home, umbrella - and likely would no matter my wealth, for all the reasons stated before.
If MMM does self-insure, perhaps it's a combination of frugality, not being beholden to an insurance inspector's interpretation of the validity of a potential claim, and that he's grossing ~10x the cost of his house annually.
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I'm really honestly surprised by everyone saying that it makes sense to self insure as long as you have enough money because insurers are greedy little buggers that just make momey off of premiums....
You can pay home insurance your whole life and never come close to approaching the value of your home. While not all insurance males sense, home insurance is a typical good buy.
To be fair, most people are saying that it doesn't make sense to pay because it's mathematically a poor decision and financially sub optimal. The point that insurance companies run a profit is just one piece of evidence to that point.
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Insurance companies make plenty of money even after they pay for a lot of unrelated things like advertisements and employees. With a higher NW and especially with his skillset, MMM insuring his own house makes no sense and would be a strike against his credibility if he did so. Total destruction of a house is super super rare and even if that did happen it probably would not cost him anywhere near the "value" of the house to rebuild it. Losing our house would be a financial catastrophe so we insure against it like most people. If our net worth were about 10x what it is we would also probably skip home owners insurance. We would stop insuring at a lower ratio if my DIY construction skills were on the level of MMM.
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I would never go without insurance. Back in 2004 I was hit with three hurricanes, an astronomical chance that that would happen, but it did. Three times I had to file a claim for damage, three times insurance took care of it, even rebuilding half of the house after Jeanne hit. I just got back from fleeing Matthew, not knowing if I would have a house to come back to. Thankfully I did, but knowing that I have insurance and that everything would be covered if that wasn't the case was one less thing I had to worry about.
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I would never go without insurance. Back in 2004 I was hit with three hurricanes, an astronomical chance that that would happen, but it did. Three times I had to file a claim for damage, three times insurance took care of it, even rebuilding half of the house after Jeanne hit. I just got back from fleeing Matthew, not knowing if I would have a house to come back to. Thankfully I did, but knowing that I have insurance and that everything would be covered if that wasn't the case was one less thing I had to worry about.
Not many hurricanes in Longmont Colorado. Or earthquakes, mud slides, forest fires, tornadoes, etc.
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I just don't get it lol. I understand that insurance companies run a profit, I understand that you will probably not use it ever in your lifetime, but it just doesn't make sense from a risk/reward standpoint.
It wouldn't matter if I was worth $0 or $1mil. My home is worth $180k and I pay <$500/year. It's far too small of an amount to justify the potential loss of an asset worth that much regardless of income. The cost is 0.278% of the total value of my home.
Now I do see here some people are paying WAY more than I have to pay for insurance, so I can see in some situations how it may make more sense to dump it. However, it also seems like those people are far more likely to need their insurance.
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I think it makes more sense to insure from a liability standpoint. Replacement costs have a limited upside, liability does not. Again, insurance is a hedge against risk, not an investment. You are trying to defend against the black swan event.
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It's far too small of an amount to justify the potential loss of an asset worth that much regardless of income. The cost is 0.278% of the total value of my home.
If you extrapolate that logic, you should insure every single possession in your home in case it breaks.
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A house worth $400k could probably be replaced by Pete for $100k, because the land doesn't go away, and he has mad construction skills.
His house has a metal roof, which minimizes the chance of it burning down.
He has a home-based business or three. It's possible that his insurance costs are categorized as business expenses, which are not reported.
It's an interesting conversation and I'd love to hear more details from the source. I'd also love to hear his thoughts on LTC insurance, the utility of which I am also very skeptical.
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It's far too small of an amount to justify the potential loss of an asset worth that much regardless of income. The cost is 0.278% of the total value of my home.
If you extrapolate that logic, you should insure every single possession in your home in case it breaks.
Most people do, through their homeowner's insurance, but most belongings do not hit the duductible cap individually.
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Just popping in to proclaim my jealousy of those of you with $60-$80-$100/mo. insurance policies. Here in hurricane alley, I pay ~$3200/yr for basic + $750/yr for flood, which comes to around $330/mo. This is on a ~$200k house. Yes, I've shopped around 😕 (But it may be time to try again)
Why should you be jealous of us? I'm willing to bet that the risk differential is even higher than the cost differential, so we're subsidizing you. (And the subsidy gets even bigger once you consider that our tax dollars also pay for FEMA!)
Oh thank you, good sir, for subsidizing me!
*grovel grovel*
*licks boot*
You wanna swap insurance bills? Didn't think so. That's why I'm jealous. Even if you are subsidizing me*, it's still better to pay a fraction of what I pay. It's not like I get some extra-special experience living here in Satan's anus.
*unsubstantiated
you're choosing to live there. in a place where homes are more likely to be destroyed. so why exactly are you jealous. you can move
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A house worth $400k could probably be replaced by Pete for $100k, because the land doesn't go away, and he has mad construction skills.
His house has a metal roof, which minimizes the chance of it burning down.
He has a home-based business or three. It's possible that his insurance costs are categorized as business expenses, which are not reported.
It's an interesting conversation and I'd love to hear more details from the source. I'd also love to hear his thoughts on LTC insurance, the utility of which I am also very skeptical.
While the land does not go away, home destruction is usually not cheaper. Especially in total loss you have to pay for clean up and removal. I've heard that some home replacement costs can reach 150% of value. This definitely depends on what area of the country you live in (ie is the land itself really valuable), but home insurance on a $400k home can in actuality end up covering 500-600k in expenses.
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We should stop with the extrapolation comments, e.g., "if you extrapolate that concept, you would buy insurance for every item in your home, etc."
The purpose of insurance is to prevent financial devastation. If you would not be financially devastated by an event, you shouldn't bother buying insurance for it.
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We should stop with the extrapolation comments, e.g., "if you extrapolate that concept, you would buy insurance for every item in your home, etc."
The purpose of insurance is to prevent financial devastation. If you would not be financially devastated by an event, you shouldn't bother buying insurance for it.
The question remains what should be considered "financially devastated"? If the asset is only 20% of your net worth? 10%? 1%? I would say that MMM's home is currently about 10% of his wealth, which means the insurance would cover up to 15-20% of his net worth (albeit rare event). That's personally too much for me. I wouldn't consider dropping insurance until it was sub 5% of my wealth. I think I dropped C&C on our car when it was about 3-4% of our wealth. Perhaps most people here have higher risk tolerances, but let's not pretend $400k, even for MMM, is a small amount.
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It's going to be about 28 years before I repay the insurance company for the payout I just received when my neighbours tree fell on my house last year. If I hadn't been insured I'd have taken a big bite out of my savings to fix the house.
Maybe if I was MMM and had that kind of liquidity, but I don't.
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It's far too small of an amount to justify the potential loss of an asset worth that much regardless of income. The cost is 0.278% of the total value of my home.
If you extrapolate that logic, you should insure every single possession in your home in case it breaks.
If I could insure every aspect of my life for .278% of it's value, sign me up.
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Since MMM's only likely source of loss is Fire (maybe hail, but that wouldn't cause total loss). I looked up the Fire statistics. There were 365,500 house fires last year and 124.6 million homes. That means about .29% of homes each year catch on fire. Seeing as home insurance covers more than just house fires, if his home insurance is $1500/yr, I would definitely say he is making a bad deal, and being on the wrong side of that deal is a huge loss. MMM's wealth status or not, you take this deal.
Here is where your math fails.
.29% of homes catch fire per year. They do not burn to the ground. I would be 90% of those house fires are like "oven on fire" - $500 type accidents. They aren't "house is flattened" type accidents.
That said I still buy house insurance, because I don't have the stash to rebuild without a hurt. But it is about the only insurance I buy.
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Since MMM's only likely source of loss is Fire (maybe hail, but that wouldn't cause total loss). I looked up the Fire statistics. There were 365,500 house fires last year and 124.6 million homes. That means about .29% of homes each year catch on fire. Seeing as home insurance covers more than just house fires, if his home insurance is $1500/yr, I would definitely say he is making a bad deal, and being on the wrong side of that deal is a huge loss. MMM's wealth status or not, you take this deal.
Here is where your math fails.
.29% of homes catch fire per year. They do not burn to the ground. I would be 90% of those house fires are like "oven on fire" - $500 type accidents. They aren't "house is flattened" type accidents.
That said I still buy house insurance, because I don't have the stash to rebuild without a hurt. But it is about the only insurance I buy.
Ehh even if it isn't a total fire things can get pricey quick. There was a guy in my neighborhood that had one corner of his house catch on fire and because it ruined plumbing, roof, inside and outside walls, the cost came out to 50k. Now if 50k of expenses is all we're talking about, totally sepf-insurable by MMM. But even a small fire can be a pricey operation.
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We should stop with the extrapolation comments, e.g., "if you extrapolate that concept, you would buy insurance for every item in your home, etc."
The purpose of insurance is to prevent financial devastation. If you would not be financially devastated by an event, you shouldn't bother buying insurance for it.
The question remains what should be considered "financially devastated"? If the asset is only 20% of your net worth? 10%? 1%? I would say that MMM's home is currently about 10% of his wealth, which means the insurance would cover up to 15-20% of his net worth (albeit rare event). That's personally too much for me. I wouldn't consider dropping insurance until it was sub 5% of my wealth. I think I dropped C&C on our car when it was about 3-4% of our wealth. Perhaps most people here have higher risk tolerances, but let's not pretend $400k, even for MMM, is a small amount.
Do remember, MMM has a networth of probably 5X what he needs. He could take a loss of 80% (probably more) of his networth and it would not affect his lifestyle, happiness or habits one bit.
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From a guy who brags about his millions?
I have not yet been exposed to this and it would turn me off if I had. I think one of his special gifts is always sounding like he's just a regular guy. (Except when I saw a picture of him towing a washing machine behind a bicycle. You would get thrown in a loony bin if you did that in my town, not to mention killed by a passing truck driver who didn't know how wide his trailer was.)
I burst out laughing when I got to loony bin!
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A house worth $400k could probably be replaced by Pete for $100k, because the land doesn't go away, and he has mad construction skills.
His house has a metal roof, which minimizes the chance of it burning down.
He has a home-based business or three. It's possible that his insurance costs are categorized as business expenses, which are not reported.
It's an interesting conversation and I'd love to hear more details from the source. I'd also love to hear his thoughts on LTC insurance, the utility of which I am also very skeptical.
While the land does not go away, home destruction is usually not cheaper. Especially in total loss you have to pay for clean up and removal. I've heard that some home replacement costs can reach 150% of value. This definitely depends on what area of the country you live in (ie is the land itself really valuable), but home insurance on a $400k home can in actuality end up covering 500-600k in expenses.
Sorry, but this does not stand up to a badass mustachian's reality. NFW would it cost Pete 150% of value to rebuild his home. This sounds like something an insurance agent would say to scare you into over insuring. Don't be a sukka.
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I've heard that some home replacement costs can reach 150% of value.
Sorry, but this does not stand up to a badass mustachian's reality. NFW would it cost Pete 150% of value to rebuild his home. This sounds like something an insurance agent would say to scare you into over insuring. Don't be a sukka.
I think the real reason for the "150% of value" figure is the assumption that most houses aren't new. The value of the existing house is depreciated but the replacement costs aren't.
Of course, it's certainly true that Pete's ability to DIY the reconstruction could save him a bunch of money, but that's not the point. The replacement cost is based on having a professional contractor do the work -- in other words, the amount Pete could charge if he were rebuilding somebody else's house instead of his own.
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I've heard that some home replacement costs can reach 150% of value.
Sorry, but this does not stand up to a badass mustachian's reality. NFW would it cost Pete 150% of value to rebuild his home. This sounds like something an insurance agent would say to scare you into over insuring. Don't be a sukka.
I think the real reason for the "150% of value" figure is the assumption that most houses aren't new. The value of the existing house is depreciated but the replacement costs aren't.
Of course, it's certainly true that Pete's ability to DIY the reconstruction could save him a bunch of money, but that's not the point. The replacement cost is based on having a professional contractor do the work -- in other words, the amount Pete could charge if he were rebuilding somebody else's house instead of his own.
If anything, this actually argues for Pete TO insure his house. The insurance company would assess the damage and write a big check, and Pete could rebuild his house for fun and pocket the difference :) Sure, it would be insurance fraud if he did it intentionally, but would make for one heck of a blog post - My House Burned Down, It Was Fun and Profitable!
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Based on what I have read, which I have not verified, several people estimate Pete's NW at around 4 mil and his blog income in the 400K range. He spends roughly 25K per year (I know, he has some "business expenses" that are not included). That gives him 160x his annual expenses and climbing fast. If he had to rebuild the house with his own money, he would have 144x his annual expenses left after rebuilding for 400K. Seems to me, in his situation, homeowners insurance is unnecessary, especially given the unlikely event where he would have a total loss.
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I've heard that some home replacement costs can reach 150% of value.
Sorry, but this does not stand up to a badass mustachian's reality. NFW would it cost Pete 150% of value to rebuild his home. This sounds like something an insurance agent would say to scare you into over insuring. Don't be a sukka.
I think the real reason for the "150% of value" figure is the assumption that most houses aren't new. The value of the existing house is depreciated but the replacement costs aren't.
Of course, it's certainly true that Pete's ability to DIY the reconstruction could save him a bunch of money, but that's not the point. The replacement cost is based on having a professional contractor do the work -- in other words, the amount Pete could charge if he were rebuilding somebody else's house instead of his own.
If anything, this actually argues for Pete TO insure his house. The insurance company would assess the damage and write a big check, and Pete could rebuild his house for fun and pocket the difference :) Sure, it would be insurance fraud if he did it intentionally, but would make for one heck of a blog post - My House Burned Down, It Was Fun and Profitable!
Exactly.
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Since MMM's only likely source of loss is Fire (maybe hail, but that wouldn't cause total loss). I looked up the Fire statistics. There were 365,500 house fires last year and 124.6 million homes. That means about .29% of homes each year catch on fire. Seeing as home insurance covers more than just house fires, if his home insurance is $1500/yr, I would definitely say he is making a bad deal, and being on the wrong side of that deal is a huge loss. MMM's wealth status or not, you take this deal.
Here is where your math fails.
.29% of homes catch fire per year. They do not burn to the ground. I would be 90% of those house fires are like "oven on fire" - $500 type accidents. They aren't "house is flattened" type accidents.
That said I still buy house insurance, because I don't have the stash to rebuild without a hurt. But it is about the only insurance I buy.
I think a few people here severely underestimate the cost of a fire. $500? Lol. It's cost a few thousand just for simple smoke cleanup, and even a tiny fire can cause a lot of smoke which will get everywhere. Once the fire department shows up and spray hundreds of gallons everywhere (and perhaps hack a hole in your roof or walls to vent smoke) you're probably looking at tens of thousands in damages. Huge amounts of gypboard and carpets have to be replaced, maybe over several floors. In addition perhaps all your living room furniture and electronics will be damaged beyond repair. Entire wardrobes for several people might be trash because of water and smoke etc etc.
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I agree with what Scandium said. There's a house just a few streets over from me that was damaged due to fire three years ago. I guess whoever bought it had no insurance, so what's left of it is sitting there boarded up, ugly compared to the rest of the houses around it and who knows how much longer it will sit there in that state.
Sure you can buy a house and pay cash, but if something were to happen to it can you afford to bulldoze, haul everything away and rebuild new plus replace everything you lost? That's what I pay insurance for.
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This thread is a total math failure. Surprising given the number of smart individuals on this site.
Assuming insurance companies do math and statistics correctly (which is their job), you always pay a premium for insurance over the risk times the estimated damage from a claim. That's why you don't get insurance for things you can afford to lose.
We all get that when we refuse the extended warranty at Best Buy for the $100 gadget (or whatever the current example of such things is). Best Buy pushes it because they make money off each warranty because they've priced the risk correctly, and you understand that and know that you can afford to lose the $100 item and so refuse the warranty.
The exact same analysis applies to a house. If you are truly indifferent to the loss, then you should not pay a premium to insure against it. MMM is likely safe on two fronts: (1) he can afford a total loss of $400k (really probably only $200k replacement costs) without any impact on his finances, and (2) he knows how to build things, which reduces his out-of-pocket expense if disaster strikes.
But the idea that it's just a few bucks to insure, so of course do it is a logical fallacy. Assuming the insurance companies priced the risk correctly, those few dollars are more than (1) the likelihood of claim times (2) the amount of claim.
There is only one exception to this rule that I can think of: the cost of repair/replacement. If the insurance company can pay less than you for the repairs (e.g., because Geico owns the auto repair facility and therefore pays the hourly wages of the workers rather than the hourly fee you pay for service), that might increase the odds in your favor. You see this with medical insurance where the doctor's "fee" is $200 but the doctor agrees to take $50 from Blue Cross. But that should be the only factor in play other than whether you can afford to bear the loss.
There was a similar thread on life insurance a while back, btw, and the same results apply. Insurance companies are better than you at statistics, so life insurance will statistically always be a loser. You get life insurance if there are things that you have to provide for and cannot if you die. Once you get past that point (i.e., have enough assets to cover those who depend on you), there is no reason to have life insurance. It's just math.
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This thread is a total math failure. Surprising given the number of smart individuals on this site.
Assuming insurance companies do math and statistics correctly (which is their job), you always pay a premium for insurance over the risk times the estimated damage from a claim. That's why you don't get insurance for things you can afford to lose.
We all get that when we refuse the extended warranty at Best Buy for the $100 gadget (or whatever the current example of such things is). Best Buy pushes it because they make money off each warranty because they've priced the risk correctly, and you understand that and know that you can afford to lose the $100 item and so refuse the warranty.
The exact same analysis applies to a house. If you are truly indifferent to the loss, then you should not pay a premium to insure against it. MMM is likely safe on two fronts: (1) he can afford a total loss of $400k (really probably only $200k replacement costs) without any impact on his finances, and (2) he knows how to build things, which reduces his out-of-pocket expense if disaster strikes.
But the idea that it's just a few bucks to insure, so of course do it is a logical fallacy. Assuming the insurance companies priced the risk correctly, those few dollars are more than (1) the likelihood of claim times (2) the amount of claim.
There is only one exception to this rule that I can think of: the cost of repair/replacement. If the insurance company can pay less than you for the repairs (e.g., because Geico owns the auto repair facility and therefore pays the hourly wages of the workers rather than the hourly fee you pay for service), that might increase the odds in your favor. You see this with medical insurance where the doctor's "fee" is $200 but the doctor agrees to take $50 from Blue Cross. But that should be the only factor in play other than whether you can afford to bear the loss.
There was a similar thread on life insurance a while back, btw, and the same results apply. Insurance companies are better than you at statistics, so life insurance will statistically always be a loser. You get life insurance if there are things that you have to provide for and cannot if you die. Once you get past that point (i.e., have enough assets to cover those who depend on you), there is no reason to have life insurance. It's just math.
I don't disagree with you at all regarding the dwelling/belongings coverage of the policy.
However, you're missing the whole liability portion of the equation (yes, I know the same math applies; insurance companies price it based on the risk including an expected profit).
Pete's got MILLIONS of unique eyeballs on him, his house, and his lifestyle, which means the risk of a liability suit goes up. Liability insurance is dirt cheap. If he wants to decline it...sure that makes him badass for going against the grain I guess... but it seems that most seasoned mustachians* think it's a "penny wise, pound foolish" mistake.
*I don't speak for mustachianism in general, as that would make me a hypocrite. My savings rate and carbon footprint isn't as high/low as it could be.
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This thread is a total math failure. Surprising given the number of smart individuals on this site.
Assuming insurance companies do math and statistics correctly (which is their job), you always pay a premium for insurance over the risk times the estimated damage from a claim. That's why you don't get insurance for things you can afford to lose.
We all get that when we refuse the extended warranty at Best Buy for the $100 gadget (or whatever the current example of such things is). Best Buy pushes it because they make money off each warranty because they've priced the risk correctly, and you understand that and know that you can afford to lose the $100 item and so refuse the warranty.
The exact same analysis applies to a house. If you are truly indifferent to the loss, then you should not pay a premium to insure against it. MMM is likely safe on two fronts: (1) he can afford a total loss of $400k (really probably only $200k replacement costs) without any impact on his finances, and (2) he knows how to build things, which reduces his out-of-pocket expense if disaster strikes.
But the idea that it's just a few bucks to insure, so of course do it is a logical fallacy. Assuming the insurance companies priced the risk correctly, those few dollars are more than (1) the likelihood of claim times (2) the amount of claim.
There is only one exception to this rule that I can think of: the cost of repair/replacement. If the insurance company can pay less than you for the repairs (e.g., because Geico owns the auto repair facility and therefore pays the hourly wages of the workers rather than the hourly fee you pay for service), that might increase the odds in your favor. You see this with medical insurance where the doctor's "fee" is $200 but the doctor agrees to take $50 from Blue Cross. But that should be the only factor in play other than whether you can afford to bear the loss.
There was a similar thread on life insurance a while back, btw, and the same results apply. Insurance companies are better than you at statistics, so life insurance will statistically always be a loser. You get life insurance if there are things that you have to provide for and cannot if you die. Once you get past that point (i.e., have enough assets to cover those who depend on you), there is no reason to have life insurance. It's just math.
I won't necessarily disagree with you, but why the comparison to BestBuy? I worked at BestBuy for a season when I was in college, and while I would agree that most were terrible deals there were a few where I thought BestBuy was way off on pricing. Sometimes there was a 4 year extended warranty on a $1000 TV for $40 (and for some TV's with bad manufacturing that could almost be a garauntee in 4 years)
Anyways, comparing BestBuy upselling to Home insurance is not a 1:1 comparison, as even if you couldn't afford to replace an electronic, I wouldn't suggest BestBuy warranties to anyone. Not because people can afford to replace their own electronics, but because they're a bad deal in general.
I am also worried about people's general assumption on this thread for greatly underestimating the cost of repair/replacement. Real Estate prices are pegged to building costs. If there were $100,000 bucks of spread between building or buying there would be a lot more home construction. There have been a lot of people in this thread making wild generalizations and assumptions about the profitability of insurance companies and greatly downplaying repair costs. Heck one sizable earthquake in the Denver area and several insurance companies would likely fold.
Maybe I'd feel differently if I were worth multiple millions of dollars, but at the moment it's hard to imagine.
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Q: Would an insurance company insure a house remodel that included replacing/adding beams and rafters if the structure wasn't evaluated by an engineer?
A: No.
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Sorry, those of us that are in favor of the insurance aren't "failing" at math. Often times those warranties department stores offer are like $25 on a $200 item. Most of use are smart enough to get the same warranty simply by purchasing it on a credit card and thus getting the warranty for free. So, as said that comparison isn't a 1:1 at all.
I can see where some of you are coming from, but many of you are saying "Oh, he can survive an 80% reduction in net worth" or "Oh he goes from 160x salary to 144x salary after the rebuild costs". Is it worth such a reduction though?
For the measly cost of home insurance, which wouldn't even be noticeable with his income, he could avoid such catastrophic losses regardless of whether he could weather the storm or not.
You're talking about potentially losing years, decades, or more of savings for most of us to save what? $400-1500 a year in most cases? Keep telling yourself it won't happen to you. Hopefully, it doesn't, but the risk is too great for MOST of us.
And most people are just talking about a fire. There are floods, wind, fire, theft, intential damage, injury and medical, earthquakes, riots, etc. Whether this stuff applies to you, is frequent enough to warrant insurance, and many other factors apply to whether it would be worth it or not. This is not purely a math equation.
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the risk is too great for MOST of us.
This right here is the error. The risk is not too great for you (or anyone else). It is the size of the loss if the risk materializes that may well be too great.
Your projected cost is (1) risk of event happening multiplied by (2) loss if risk materializes.
Insurance companies price that risk better than you do, and they charge you a premium for insuring against that risk.
If you can't bear the loss if the risk happens, then yes, you should absolutely have insurance. For most people, a house is one of those "can't bear the loss" items. But if you can bear the loss, then no, you should not have insurance.
You can see this more easily in an example that is the reverse of insurance.
(1) Would you pay $1 for a 50% chance to make $1.50 (or zero)?
(2) Would you pay $100 for a 50% chance to make $150?
(3) Would you pay $1,000 for a 50% chance to make $1,500.
(4) Would you pay $100,000 for a 50% chance to make $150,000?
The answer should be no in every circumstance because the expected outcome is never worth the cost times the probability of the payout.
Now go back to insurance, and don't use the term house.
Would you insure against a $100 loss if the odds were the same as (2) above?
Would you insure against a $1,000 loss if the odds were the same as (3) above?
Would you insurance against a $100,000 loss if the odds were the same as (4) above?
The answer will depend entirely on whether you can bear the loss--which has nothing to do with the risk of occurrence.
The fact that a house is involved, and a house seems like a big deal, is skewing the analysis for most people. Do you think Warren Buffet or Bill Gates should insure their house? Probably no concern because you know they can eat the loss. MMM is the same way because a $400k loss (and really much less than that--many property tax bills distinguish between the value of the land and the value of the improvements--e.g., house) would have no impact on him whatsoever. Zero. That's what it means to be FI with an additional $400k per year coming in from his blog.
The fact that doesn't describe the situation for most people doesn't change the math in any way. It just changes the ability of the person to absorb the loss. Because most people can't absorb the loss of their house, they get insurance, and that's the right thing to do in that situation.
Finally, I wasn't picking on Best Buy in particular. It was just an example of what is effectively insurance for a low-priced item. Most people intuitively understand that doesn't make sense. It highlights the point that it's the size of the potential loss that matters, not the likelihood of the loss occurring.
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Sorry, those of us that are in favor of the insurance aren't "failing" at math. Often times those warranties department stores offer are like $25 on a $200 item. Most of use are smart enough to get the same warranty simply by purchasing it on a credit card and thus getting the warranty for free. So, as said that comparison isn't a 1:1 at all.
I can see where some of you are coming from, but many of you are saying "Oh, he can survive an 80% reduction in net worth" or "Oh he goes from 160x salary to 144x salary after the rebuild costs". Is it worth such a reduction though?
For the measly cost of home insurance, which wouldn't even be noticeable with his income, he could avoid such catastrophic losses regardless of whether he could weather the storm or not.
You're talking about potentially losing years, decades, or more of savings for most of us to save what? $400-1500 a year in most cases? Keep telling yourself it won't happen to you. Hopefully, it doesn't, but the risk is too great for MOST of us.
And most people are just talking about a fire. There are floods, wind, fire, theft, intential damage, injury and medical, earthquakes, riots, etc. Whether this stuff applies to you, is frequent enough to warrant insurance, and many other factors apply to whether it would be worth it or not. This is not purely a math equation.
That should be expenses, not salary. Anyway, the point is that in some cases the cost of rebuilding in the event of a total loss becomes so insignificant compared to their overall wealth that paying someone else to insure the value of the property is not necessary. It may still be desirable, in order to sleep at night, if he can't stomach a loss that size. However, he doesn't need it and chooses not to have it. Several people have made the case that the cost of insuring is so minimal that he should get it, even if he doesn't need it. That is not much different than saying I should buy this item since it is on sale even if I don't need it. If I lose the one I have, I will wish I had bought it. However, I don't need it so it is an unnecessary purchase.
I will turn the question back to you. At what point of wealth do you think it is unnecessary for him to pay someone else to insure his house? 10 million NW, 40 mil, 100 mil? Or do you think he should always buy insurance no matter his level of wealth? Most would agree that Warren Buffet doesn't need to insure his home. What is the point at which you think it is not necessary? He has more money than he will likely spend in his lifetime and the way the blog is earning profits, in short order he will have more than he will spend in 2 or 3 lifetimes.
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the risk is too great for MOST of us.
This right here is the error. The risk is not too great for you (or anyone else). It is the size of the loss if the risk materializes that may well be too great.
Your projected cost is (1) risk of event happening multiplied by (2) loss if risk materializes.
Insurance companies price that risk better than you do, and they charge you a premium for insuring against that risk.
If you can't bear the loss if the risk happens, then yes, you should absolutely have insurance. For most people, a house is one of those "can't bear the loss" items. But if you can bear the loss, then no, you should not have insurance.
You can see this more easily in an example that is the reverse of insurance.
(1) Would you pay $1 for a 50% chance to make $1.50 (or zero)?
(2) Would you pay $100 for a 50% chance to make $150?
(3) Would you pay $1,000 for a 50% chance to make $1,500.
(4) Would you pay $100,000 for a 50% chance to make $150,000?
The answer should be no in every circumstance because the expected outcome is never worth the cost times the probability of the payout.
Now go back to insurance, and don't use the term house.
Would you insure against a $100 loss if the odds were the same as (2) above?
Would you insure against a $1,000 loss if the odds were the same as (3) above?
Would you insurance against a $100,000 loss if the odds were the same as (4) above?
The answer will depend entirely on whether you can bear the loss--which has nothing to do with the risk of occurrence.
The fact that a house is involved, and a house seems like a big deal, is skewing the analysis for most people. Do you think Warren Buffet or Bill Gates should insure their house? Probably no concern because you know they can eat the loss. MMM is the same way because a $400k loss (and really much less than that--many property tax bills distinguish between the value of the land and the value of the improvements--e.g., house) would have no impact on him whatsoever. Zero. That's what it means to be FI with an additional $400k per year coming in from his blog.
The fact that doesn't describe the situation for most people doesn't change the math in any way. It just changes the ability of the person to absorb the loss. Because most people can't absorb the loss of their house, they get insurance, and that's the right thing to do in that situation.
Finally, I wasn't picking on Best Buy in particular. It was just an example of what is effectively insurance for a low-priced item. Most people intuitively understand that doesn't make sense. It highlights the point that it's the size of the potential loss that matters, not the likelihood of the loss occurring.
Man you did it again. You were making sense but then you create this nonsensical hypothetical that is not at all the actual scenario.
1. Insurance is not a 50/50 chance of a 50% gain.
2. Projected cost is the cost only when your the one writing the insurance. It is the cost per person averaged over a large swath of people. Therefor only insurance companies can use projected cost when estimating what to charge.
For the individual the deal is more like this:
Your in a room with 1000 other people. 1 of you will suffer a $200,000 loss this year. You can either take your chances or pay $300 upfront to cover the loss if it happens to you.
Is that a good deal? At least that's a somewhat accurate representation of what we're arguing. There seem to be three main arguments:
1. If my chances are only 1/1000 then a fair insurance should cost $200. I don't want to pay that extra $100 because it's just profiting someone else.
2. Even if I pay this fee my entire adult life, I won't even come close to paying 15% of what it covers. So even if I get blown out once, I'll have come out ahead.
3. I'm worth $10 million. I could take this hit 40 years in a row and it won't affect my lifestyle. Therefor I don't need it.
Each situation above describes a different place in life and a different security profile, but I don't necessarily think any of them are completely right or wrong. I personally happen to fall in number 2. I've lived in tornado alley. I lived in Tuscaloosa, AL during the 2011 tornado epidemic. When tornadoes blow through your town and destroy 12% of your entire town, you realize that destruction is real and it's an actual possibility. I feel that several here have never experienced destruction, and so you feel immune from it, but we're all one step away.
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I feel that several here have never experienced destruction, and so you feel immune from it, but we're all one step away.
I agree with you that most of us need the insurance. Given my level of NW, I wouldn't get caught without it. I thought the question was more along the lines of whether MMM needs it. In his case, I say no, he does not (for reasons mentioned earlier).
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Each situation above describes a different place in life and a different security profile, but I don't necessarily think any of them are completely right or wrong. I personally happen to fall in number 2. I've lived in tornado alley. I lived in Tuscaloosa, AL during the 2011 tornado epidemic. When tornadoes blow through your town and destroy 12% of your entire town, you realize that destruction is real and it's an actual possibility. I feel that several here have never experienced destruction, and so you feel immune from it, but we're all one step away.
Emotional arguments are irrelevant. After all, insurance doesn't stop the destruction from happening!
The only question is whether the money provided by the insurance settlement would alleviate the financial hardship the loss creates. No hardship = no need for insurance.
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So, we can all agree that most of us need it who aren't extremely rich, because it would cause us financial hardship.
Now when we become rich (at what amount I don't know?), 4mil, 40mil ,400mil. I mean whatever. To me I would have so much disposable income at that point growing my money wouldn't be hard. So, why not carry insurance? I mean especially if you live like a true mustachian or at least are somewhat careful with your money.
That's just my mindset. It seems minimal compared to the potential loss. To me it seems the more you have, the more wealth you accumulate, the more beneficial insurance would become.
Honestly, this seems more like an asset allocation question for stocks. Some people seem to have way more risk tolerance than others, but it doesn't make one wrong. I tend to lean toward keeping my insurance, but to each their own.
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Now when we become rich (at what amount I don't know?), 4mil, 40mil ,400mil. I mean whatever. To me I would have so much disposable income at that point growing my money wouldn't be hard. So, why not carry insurance?
Because it's mathematically sub-optimal. Sure it's not financially devastating, it's just a poor decision from a loss/reward perspective. ESPECIALLY for a true mustachian who knows that they would have 'enough' even if they had to replace their house, as is the case for Pete.
No one is suggesting that no one should buy insurance. They're simply stating that for some people it is a wise choice, mathematically speaking, not to.
Unlike CyclingStache, I am unsurprised by the number of people on this board who are poor at math. Posters on this site have an average grasp of math and statistics, and it's clearly evident in threads such as this.
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I think it's funny that this thread is three pages long and everyone is assuming that Pete does not carry insurance. I still believe the pea is merely under a different shell.
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I think it's funny that this thread is three pages long and everyone is assuming that Pete does not carry insurance. I still believe the pea is merely under a different shell.
I think the problem is that he very creatively categorizes his expenses in order to always have "low spending" and hides a lot of expenses.
If he's doing the same with homeowners insurance (I don't see it on the 2015 report (http://www.mrmoneymustache.com/2016/04/01/mmm-spending-2015/)) and he explicitly said regarding homeowners insurance:
I am self-insured for now, since the cost (and extremely low probability) of replacing the house would not be a significant burden.
then I guess he's a pretty blatant liar.
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I think it's funny that this thread is three pages long and everyone is assuming that Pete does not carry insurance. I still believe the pea is merely under a different shell.
I think the problem is that he very creatively categorizes his expenses in order to always have "low spending" and hides a lot of expenses.
If he's doing the same with homeowners insurance (I don't see it on the 2015 report (http://www.mrmoneymustache.com/2016/04/01/mmm-spending-2015/)) and he explicitly said regarding homeowners insurance:
I am self-insured for now, since the cost (and extremely low probability) of replacing the house would not be a significant burden.
then I guess he's a pretty blatant liar.
Calling him a blatant liar is extreme. I have no problem if his choice is to self-insure his home, which is a tiny fraction of his net worth. I do find it interesting that so many feel the need to stridently condemn his decision, sans possession of complete facts.
Please don't assume that statement you quoted proves he carries no insurance at al.
Here's just one possible scenario: Mr. MMM doesn't care about HO insurance, but Mrs. MMM does, so she pays for it out of her business earnings and deducts it as an expense of her Real Estate business. Who really knows? Besides, what Pete does for himself may not be what is best for you.
This is the guy who said he put his "last" 100k into some high-fee investment firm that specializes in harvesting tax losses. That firm pays him handsomely to promote a concept that may be valuable to a tiny portion of his own burgeoning portfolio, but is wildly inappropriate for most newbie investors. I could cry every time I see a case study where a beginner is so proud of his XXXX account.
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I don't condemn him as it's his choice to insure or not and he's willing to take that risk. I'm not willing to, nor could I afford to.
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Calling him a blatant liar is extreme. I have no problem if his choice is to self-insure his home, which is a tiny fraction of his net worth. I do find it interesting that so many feel the need to stridently condemn his decision, sans possession of complete facts.
Please don't assume that statement you quoted proves he carries no insurance at al.
Assuming that it is true (the MMM family carries homeowners insurance, in spite of the linked budget/claim), the veracity of which is not established, I find it really hard to not consider it blatant lying to write what he said there.
Blurring personal/business expenses is fine. The problem comes if you trumpet low household expenses by moving personal expenses into business expenses. That is deceptively misleading, and if it happens I am absolutely fine saying doing so is blatantly lying.
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Each situation above describes a different place in life and a different security profile, but I don't necessarily think any of them are completely right or wrong. I personally happen to fall in number 2. I've lived in tornado alley. I lived in Tuscaloosa, AL during the 2011 tornado epidemic. When tornadoes blow through your town and destroy 12% of your entire town, you realize that destruction is real and it's an actual possibility. I feel that several here have never experienced destruction, and so you feel immune from it, but we're all one step away.
Emotional arguments are irrelevant. After all, insurance doesn't stop the destruction from happening!
The only question is whether the money provided by the insurance settlement would alleviate the financial hardship the loss creates. No hardship = no need for insurance.
Well just shake me down and call me Jimmy. Excuse me for telling my story; guess I'm in the wrong place for that.
I guess if you want to ignore everything else I posted and re-frame the question with your own and call yourself the winner you can do that then.
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Now when we become rich (at what amount I don't know?), 4mil, 40mil ,400mil. I mean whatever. To me I would have so much disposable income at that point growing my money wouldn't be hard. So, why not carry insurance?
Because it's mathematically sub-optimal. Sure it's not financially devastating, it's just a poor decision from a loss/reward perspective. ESPECIALLY for a true mustachian who knows that they would have 'enough' even if they had to replace their house, as is the case for Pete.
No one is suggesting that no one should buy insurance. They're simply stating that for some people it is a wise choice, mathematically speaking, not to.
Unlike CyclingStache, I am unsurprised by the number of people on this board who are poor at math. Posters on this site have an average grasp of math and statistics, and it's clearly evident in threads such as this.
Demeaning people on this thread is really not helpful whatsoever. You know we have these debates all the time on this forum. People who demand that owing your mortgage as long as possible is "mathematically" superior. And everyone here probably already knows that Pete doesn't have a mortgage anymore. Well I guess that just makes him bad at math.
I understand that after some point of wealth it isn't worth the bother. I personally don't think 4mil is high enough. I think if I had $4mil, $400k would still feel like a heck of a lot money. I said earlier in this post I think my personal threshold would be around <5% of net worth. I think the same is true for mortgages, at some point the benefit of what you get out of leveraging your mortgage isn't worth managing the account.
There has also been a lot of conflating different insurance products. Not all insurance is made equal, and extended warranties are definitely not equivalent to what were talking about.
Is life insurance worth it? If you like going skydiving, then yeah you're probably at a higher risk than average; it would be easy money then (ie you know that your lifestyle leaves you EV+ on the life insurance). If you just like reading books, and don't have dependents, then probably not. I think to a certain extant the same is true for home insurance. Do you live in tornado/hurricane land? Is your area ravaged by fires, floods, or landslides? I think everyone should have an idea about what their risk is for each of these. If you live in an area of likely damage every 10-20 years, then you're probably in an EV+ area. Just as everyone else has stated, a large section of safe housing of the nation pays for the rest.
What are Pete's risks? I don't know. I've never lived in CO. I don't know what trees are around him, how frequently large fires happen in his area. But if you live in an area known as a 10-year flood zone, well then I guess that's some pretty easy math to figure out.
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This thread is a total math failure. Surprising given the number of smart individuals on this site.
Assuming insurance companies do math and statistics correctly (which is their job), you always pay a premium for insurance over the risk times the estimated damage from a claim. That's why you don't get insurance for things you can afford to lose.
We all get that when we refuse the extended warranty at Best Buy for the $100 gadget (or whatever the current example of such things is). Best Buy pushes it because they make money off each warranty because they've priced the risk correctly, and you understand that and know that you can afford to lose the $100 item and so refuse the warranty.
The exact same analysis applies to a house. If you are truly indifferent to the loss, then you should not pay a premium to insure against it. MMM is likely safe on two fronts: (1) he can afford a total loss of $400k (really probably only $200k replacement costs) without any impact on his finances, and (2) he knows how to build things, which reduces his out-of-pocket expense if disaster strikes.
But the idea that it's just a few bucks to insure, so of course do it is a logical fallacy. Assuming the insurance companies priced the risk correctly, those few dollars are more than (1) the likelihood of claim times (2) the amount of claim.
There is only one exception to this rule that I can think of: the cost of repair/replacement. If the insurance company can pay less than you for the repairs (e.g., because Geico owns the auto repair facility and therefore pays the hourly wages of the workers rather than the hourly fee you pay for service), that might increase the odds in your favor. You see this with medical insurance where the doctor's "fee" is $200 but the doctor agrees to take $50 from Blue Cross. But that should be the only factor in play other than whether you can afford to bear the loss.
There was a similar thread on life insurance a while back, btw, and the same results apply. Insurance companies are better than you at statistics, so life insurance will statistically always be a loser. You get life insurance if there are things that you have to provide for and cannot if you die. Once you get past that point (i.e., have enough assets to cover those who depend on you), there is no reason to have life insurance. It's just math.
Winner. This should not be a 4 page thread.
Insuring a house (or buying many other types of insurance) is -EV (negative expected value) for the purchaser of insurance. The reason you take a slightly negative EV bet is that it is a risk that you cannot bear if it were to come to fruition.
If it is a risk that you are willing and able to bear, you should not buy insurance.
Most people do not consider self-insuring their home because they are not able (lack of assets) or are unwilling (low risk tolerance). That does not mean the above math fails.
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I think it's funny that this thread is three pages long and everyone is assuming that Pete does not carry insurance. I still believe the pea is merely under a different shell.
I think the problem is that he very creatively categorizes his expenses in order to always have "low spending" and hides a lot of expenses.
If he's doing the same with homeowners insurance (I don't see it on the 2015 report (http://www.mrmoneymustache.com/2016/04/01/mmm-spending-2015/)) and he explicitly said regarding homeowners insurance:
I am self-insured for now, since the cost (and extremely low probability) of replacing the house would not be a significant burden.
then I guess he's a pretty blatant liar.
If you look at the comments on the 2015 report that you linked to, you will see that MMM twice says that he is planning to get homeowners insurance; he just hadn't done so on his new house at the time of that report. I pointed out those comments earlier in this thread (page 2).
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This thread is a total math failure. Surprising given the number of smart individuals on this site.
Assuming insurance companies do math and statistics correctly (which is their job), you always pay a premium for insurance over the risk times the estimated damage from a claim. That's why you don't get insurance for things you can afford to lose.
We all get that when we refuse the extended warranty at Best Buy for the $100 gadget (or whatever the current example of such things is). Best Buy pushes it because they make money off each warranty because they've priced the risk correctly, and you understand that and know that you can afford to lose the $100 item and so refuse the warranty.
The exact same analysis applies to a house. If you are truly indifferent to the loss, then you should not pay a premium to insure against it. MMM is likely safe on two fronts: (1) he can afford a total loss of $400k (really probably only $200k replacement costs) without any impact on his finances, and (2) he knows how to build things, which reduces his out-of-pocket expense if disaster strikes.
But the idea that it's just a few bucks to insure, so of course do it is a logical fallacy. Assuming the insurance companies priced the risk correctly, those few dollars are more than (1) the likelihood of claim times (2) the amount of claim.
There is only one exception to this rule that I can think of: the cost of repair/replacement. If the insurance company can pay less than you for the repairs (e.g., because Geico owns the auto repair facility and therefore pays the hourly wages of the workers rather than the hourly fee you pay for service), that might increase the odds in your favor. You see this with medical insurance where the doctor's "fee" is $200 but the doctor agrees to take $50 from Blue Cross. But that should be the only factor in play other than whether you can afford to bear the loss.
There was a similar thread on life insurance a while back, btw, and the same results apply. Insurance companies are better than you at statistics, so life insurance will statistically always be a loser. You get life insurance if there are things that you have to provide for and cannot if you die. Once you get past that point (i.e., have enough assets to cover those who depend on you), there is no reason to have life insurance. It's just math.
Winner. This should not be a 4 page thread.
Insuring a house (or buying many other types of insurance) is -EV (negative expected value) for the purchaser of insurance. The reason you take a slightly negative EV bet is that it is a risk that you cannot bear if it were to come to fruition.
If it is a risk that you are willing and able to bear, you should not buy insurance.
Most people do not consider self-insuring their home because they are not able (lack of assets) or are unwilling (low risk tolerance). That does not mean the above math fails.
This. Understanding the math in full, seeing both sides of the equation and then choosing a different option is fine. But arguing that the math is wrong because of feelings or annecdotes does not help the people on this forum make better choices.