Pros and Cons of Homeowners Insurance

25 Feb
Pros Cons Homeowners Insurance

While dumping your homeowners insurance will certainly put a few bucks in your pocket every month, in the long run it can be a very dangerous gamble.

If you have recently paid off your mortgage or bought a house for cash, you may be considering dropping your homeowners insurance. While dumping your homeowners insurance will certainly put a few bucks in your pocket every month, in the long run it can be a very dangerous gamble.

The majority of us don’t have the option to drop our home insurance. If you have a mortgage, your lender will require you to carry homeowners insurance and according to statistics the vast majority of homeowners follow these rules. Data from the Insurance Information Institute shows that more than 98% of homeowners with mortgages have a homeowners policy.

Once you have paid off that mortgage, and you own the house free and clear, you are free to drop your homeowners insurance if you choose. According to the insurance information Institute roughly 3% of homeowners in the United States do not have homeowners coverage.

In most cases people who drop homeowners insurance either can’t afford the premiums or are so wealthy they are not concerned about potential losses and can basically self-insure.

Some homeowners may not dump their insurance, it dumps them. According to the Insurance Information Institute roughly 1 percent of homeowners are unable to get homeowners coverage because they are declared uninsurable. This is usually due to several recent claims, but can also happen because of ancient electrical systems, mold or even aging pipes.

Lets have a quick look at the pros and cons of dropping homeowners insurance:

The Pros of Dropping Your Coverage

Cost: The truth is, the only real pro when it comes to dropping homeowners coverage is ditching the monthly premium. Depending on where your home is located homeowners insurance can be quite expensive, this is especially true if your home is located oceanfront or in an area prone to natural disasters.

Florida is a prime example of a state where natural disasters have pushed up the cost of coverage. State regulators approved a 10.8 percent increase in 2013 and in 2014, insurance companies were requesting additional increases of roughly 15 percent.

These types of increases can hit homeowners that are on a fixed budget or retiree’s hard, and push premiums into the unaffordable range.

While rate increases can push insurance premiums into the stratosphere, is it ever a good to dump your policy? Probably not, unless you are very wealthy.

The Cons of Dropping your Coverage

Replacement Costs: While there is certainly more than one reason to keep your homeowners coverage, the big one is the protection it provides if the worst happens. Unless you can afford to rebuild your house, and replace all of your belongings in the event of a fire or other natural disaster that destroys your home, a homeowners policy is a necessity.

A standard policy will cover the cost to rebuild the structure of your home and replace all of your personal belongings up to policy limits. In addition, most homeowner policies will cover the cost of temporary living conditions if you are unable to stay in your home after a disaster.

All of this can add up to a significant amount of money, which the majority of us would not be able to cover if the worst was to happen.

Standard homeowners policy will cover damages for fire, hurricane, hail, lightning or other disasters listed in your policy. It is important to remember that flood damage and earthquake damage are not covered by a standard policy.

Liability: Even if you are comfortable covering the cost of rebuilding your house and replacing your possessions, homeowners insurance also protects you in the event of a liability lawsuit.

If someone slips and hurts themselves on your property, or your dog or other pet bites or injures a person, your homeowners liability coverage will step in and cover the cost of damages as well as mount a legal defense if necessary.

While it is pretty easy to calculate the cost to rebuild your home and replace your possessions, liability lawsuits can cost millions of dollars. If you end up on the losing side of a liability lawsuit you could lose all of your financial assets including your home. 

Living Expenses: If your home is completely destroyed it could take up to a year to rebuild your home and in the meantime you will need a place to live. Homeowners insurance will help cover those expenses, which can be significant.

Possessions: Homeowners insurance not only protects your possessions if they are destroyed in a fire or natural disaster, they are also protected against burglary. If someone breaks into your home, your possessions will be replaced. It’s important to remember there are limits on high value items such as jewelry, art and other collectibles. If you have a significant amount of these types of possessions you will need an additional rider to fully protect them.

Things to Remember: Flood and earthquake damage are not covered by a standard homeowners policy. If you live in an area where flooding or earthquakes are common you should and consider a separate policy to protect against these perils.

Flood insurance policies are sold via normal insurance agents but the prices are set by the National Flood Insurance Program. There are restrictions on flood insurance policies so make sure you completely understand the coverage.

When it comes to earthquake insurance the deductible is usually a percentage of your total policy coverage, which can be a significant amount of money. As an example, if your home is insured for $500,000 and the deductible is 15% of the policy you will be on the hook for $75,000 in the event your home is damaged or destroyed by an earthquake.

Lowering Your Costs: If the cost of your homeowners insurance has gotten too high there are a few things you can do to lower your cost:

Raise your deductible: Raising your deductible as high as you can possibly afford will help bring down your insurance cost. Make sure you can afford the deductible should the worst happen. Experts advise keeping the deductible amount in an interest bearing account.

Ask For Discounts: Make sure you are getting all the home insurance discounts that you qualify for on your policy. Insurers offer numerous discounts, bundling your policies, security systems, and sprinkler systems are just a few things that could garner a significant savings. Ask your agent to review your policy for missing discounts.

While it is possible to save some money by switching your policy to an actual cash value versus replacement value most experts do not recommend this course of action. Actual cash value pays out the replacement cost minus depreciation which could make you responsible for a large amount of money should you need to make a big claim. In most cases, the premium savings is simply not worth the risk.

Although having free homeowners insurance would be a dream come true, the advantages of having great home insurance coverage to help protect your most valuable investment certainly outweighs the annual premium cost. At, we would be more than happy to help you compare up to 12 rates and coverage options. If we can help you save money, while also improving your coverage, please click here to get online home insurance quotes now.

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