MMM Decides to Self insure his house?

[Paul der Krake]

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. :)

[Vorpal]

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.

[Fireball]

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.

[Chris22]

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.

[seattlecyclone]

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.

[Chris22]

Fine, but let's not pretend investing the token amount of money saved has anything to do with it.

[Fireball]

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.

[accolay]

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?

[bop]

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/
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.   

[Jack]

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!)

[spud1987]

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.

[TheOldestYoungMan]

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.

[EscapeVelocity2020]

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! 

[Metric Mouse]

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)

[libertarian4321]

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.

[clarkfan1979]

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.

[TomTX]

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.

[FIPurpose]

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.

[ender]

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.

[FIPurpose]

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.

[Paul der Krake]

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.

[SpreadsheetMan]

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 ;-)

[thunderball]

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.

[Metric Mouse]

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.

[Vilgan]

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.

[Khaetra]

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.

[TomTX]

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.

[beastykato]

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.

[The Happy Philosopher]

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.

[cheapass]

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.

[Dicey]

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.

[Chris22]

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.

[boarder42]

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

[FIPurpose]

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.

[Fredster4]

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.

[FIPurpose]

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.

[rocketpj]

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.

[beastykato]

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.

[MrFrugalChicago]

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.

[FIPurpose]

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.

[Metric Mouse]

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.

[CU Tiger]

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!

[Dicey]

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.

[Jack]

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.

[EscapeVelocity2020]

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! 

[BoonDogle]

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.

[Jack]

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.

[Scandium]

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.

[Khaetra]

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.

[Cycling Stache]

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.