Is It Really Possible to Go Without Home Insurance?

Posted in Home Insurance

November 25th, 2010

In 2005, the United States, especially the Florida coast and New Orleans, were hit with seven hurricanes that made landfall. At the same time, America’s home insurance companies were hit by an estimated $60 billion bill.

The 2005 season was the busiest on record, with 27 named storms and 11 federal disaster declarations. The year’s three most devastating hurricanes, Katrina, Rita and Wilma, together accounted for over $45 billion of the total losses. As a result of the pounding the Florida and Louisiana coasts took along with insurance companies, many insurers chose not to renew policies the next time they were up for renewal. The cost was simply too great.

Do People Really Opt Out of Homeowner’s Insurance?

The 2004 Atlantic hurricane season was particularly brutal for Florida, which had four strong to major hurricanes–Charley, Frances, Jeanne and Ivan–occur rapidly over a span of about a month and a half. Ever since, insurance premiums have been on the rise in areas of America that are particularly prone to storms.

In Key West, the insurance premium for a 1,500 square-foot home can cost over $15,000 per year to insure against fire, wind and flood. A home in North Miami can cost over $5,000 per year in premiums to insure. Many homeowners have been backed into a corner thanks to rapidly rising premiums and have opted to forgo home insurance altogether. While only a small subset of homeowners go this route, it can and should be used as an alternative of last resort.

When Going Without Insurance May Make Sense

If the homeowner has a mortgage, they will most likely not be able to forgo home insurance. Many lenders require borrowers to maintain a suitable level of coverage and sign agreements at closing stating they will do so. However, if the homeowner is extremely rich or the home is worth only a small amount of money, they may be able to go without insurance.

Many wealthy people choose to self-insure against losses instead of paying high premiums. Also, if the home is not worth much, owners may be able to cover the cost of completely rebuilding such a small home.

Another thing to consider is that homeowners usually lose liability insurance when they drop their home insurance. Going without liability insurance can have devastating consequences should someone get hurt on your property and you are sued. One slip by the mailman or delivery driver could wipe out your entire life savings without liability insurance.

A Few Alternatives If You Cannot Afford Home Insurance

Going without home insurance is not a good risk management choice for homeowners. For many Americans, the premium costs may still be lower than the subsequent result of a catastrophic loss, which is essentially what insurance is covering in the first place. However, you simply cannot afford to keep basic insurance coverage, here are a few alternatives to consider:

• Self-Insure: You could construct your own emergency self-insurance savings account that could be tapped instead of filing a home insurance claim. Save the money that you would have paid in premiums in an interest bearing account so you have money when you are stuck making the repairs yourself. The problem with this is that the fund would have to be quite large to cover many contingencies. You should consider what it will cost to repair or replace a major portion of your home such as your roof or walls should they become completely damaged.
• Borrow Money: If your home was damaged while you did not have insurance, you could consider borrowing money to make the needed repairs. One possibility is through a home equity line of credit if you have enough equity and are good standing with the bank.
• Play the Waiting Game: You could wait for home insurance rates to get better and take your chances that rising premiums in some areas of the country are only temporary. Keep in mind, though, dropping insurance and then trying to get it back could make it harder to find new insurance. Many insurance companies will see a homeowner with insurance gaps as a higher risk.
• Fair Plan: Many states also have assigned-risk pools for home insurance called a Fair Access to Insurance Requirements (FAIR) Plan. Policies offered through the FAIR Plan are much more basic than standard home insurance. The insurance premiums can be much higher than policies available elsewhere in the country, but they provide coverage when you cannot obtain it anywhere else.

After Hurricane Andrew demolished or damaged more than 100,000 homes near Miami in August 1992, eleven small insurance companies went out of business. The same thing has happened every year since after major storms hit America’s coast. Now, a smaller number of insurers are taking on business in troubled areas.

Paying tens of billions of dollars in claims in Florida alone has wiped out years of profits for many insurance companies. Because of this, a lot of insurers have chosen not to renew policies in high risk areas, leaving homeowners to fend for themselves without affordable insurance. Many homeowners are opting to go without insurance, but it’s ultimately to the detriment of their financial wellbeing.

Hank Coleman is the founder of Own The Dollar and several other financial websites. He is a freelance writer, entrepreneur and professional in the government sector. Hank holds a Bachelors Degree in Business Administration, a Masters in Finance and is currently studying for his Certified Financial Planning (CFP) credentials. Be sure to follow him on Twitter.