In my post, the percentage of homeowners who pay cash, a reader asked my opinion on having home insurance for paid-off properties. Paid off properties include a property you purchased with all cash or a property you own after paying off the mortgage.
This is a dilemma I wrestled with after recently paying cash for my home recently. I wanted to save money on home insurance, but I also wanted my newly acquired asset to be protected in case of a disaster.
Home insurance isn't required by law, but double check your state's law anyway. Only if you take out a mortgage to buy a house will your lender require you to have home insurance until the loan is paid off. If you refuse to get home insurance, then you most likely won't qualify for a mortgage.
Ultimately, I decided to get home insurance because I was making the most expensive home purchase of my life. The last thing I wanted to do was sink a large percentage of my net worth in a house and have it destroyed.
Let me walk you through my thought process of whether to get home insurance after paying off your mortgage or buying a house with all cash. By the end of this article, you should be able to make a more informed decision.
Home Insurance Needs For Paid Off Properties
I'm going to first tackle the question of whether to get home insurance from a home's value as a percentage of net worth point of view.
Again, the key assumption is the house has been paid off. If you have a mortgage, you have no choice but to have home insurance. Below is a chart that shows roughly 42% of American homeowners own their homes free and clear.
1) Get home insurance if the home's value is greater than 30% of your net worth
Unless your property is worth less than 30% of your net worth, I would not risk skipping home insurance. You must think in disaster scenarios when you own property. If your house completely burns down in a fire and you have no insurance, will you be OK financially?
It's not just the cost to rebuild your home that you need to worry about. It's also the cost to rent another home while it's being rebuilt. You will likely also lose a lot of valuable personal items in your destroyed home.
During the disaster phase, without home insurance, you may need to sell other assets at a discount to keep you and your family afloat.
Owning a home that's worth greater than 30% of your net worth without home insurance is too risky of a proposition.
2) Consider forgoing home insurance once your home is less than 10% of your net worth
Once your home's value is less than 10% of your net worth, it may be OK to save on home insurance by skipping it. You're living frugally and probably have tremendous cash flow and savings. For reference, the typical American has greater than 70% of their net worth in their home.
If your house burns down, it's going to hurt, but it won't ruin you financially. And what are the chances of a complete disaster? Not too high. It's common to lose 10% or more in the value of your stock holdings in any given year. As a result, losing 10% of your net worth in a natural disaster will feel like par for the course.
Based on my 20+ years of homeownership 10% is the magical threshold where you no longer worry too much about loss. For example, when I stupidly spent 30% of my net worth on a vacation property I didn't need, I worried a lot during the global financial crisis. But today, the vacation property is worth less than 3% of my net worth and I don't worry if it burns down or underperforms.
The grey area of whether to get home insurance on a paid off home is when its value as a percentage of your net worth is between 10.1% – 29.9%. Personally, I'd still get home insurance so long as my home is worth 20% or more of my net worth.
3) A compromise to save money – get an actual cash value policy instead
I'm always looking to save money, especially now that I'm house rich, cash poor. There are two types of home insurance policies you can get:
- Replacement Cost Value (RCV) – A comprehensive home insurance policy that is more expensive because it replaces the cost of your home and personal items at today's market value.
- Actual Cash Value (ACV) – A cheaper home insurance policy that replaces the value of your destroyed home and personal items after depreciation.
The most common example used to explain the difference is a roof.
Replacement Cost Value home insurance will pay for the full cost of replacing the roof at today's price, even if it's 30 years old. The roof could cost $35,000 today.
Actual Cash Value home insurance will replace the actual value of the roof after 30 years of usage. The roof could be worth only $5,000 today, so that is the amount your ACV policy will pay out.
If you want to save money and get “disaster home insurance,” then you can pay for a cheaper ACV policy. Based on my experience shopping around, an ACV policy can cost 30% – 50% less than a RCV policy.
Here's a more comprehensive post on the difference between RCV and ACV home insurance policies.
Using Time As A Variable For Whether To Get Home Insurance For A Paid Off Property
Besides thinking about housing loss risk as a percentage of net worth, think about time as a key variable for whether to get home insurance or not if your house is paid off.
1) During the first year of homeownership get home insurance
You will not know the full risks or nuances of owning your home until you actually live in it. Therefore, despite having a paid off property, I recommend having home insurance for the first year.
After the first year of homeownership, you will go through all the seasons. You'll be able to experience the rains, winds, and potential fires in your neighborhood. You'll also be made aware of neighborhood activity in terms of traffic, thefts, and other disturbances caused by others.
With one year's worth of data, you can then make a more informed decision on whether you need home insurance or not. Please take time to understand what a home insurance policy entails.
2) After three years of living in your home you will know better
One year of living in your home is probably not long enough to get the most comprehensive picture of your home's risks. But after living in your paid off home for three years, you can make a better decision on whether to keep or drop your home insurance coverage.
The more violent the weather and home disturbances during your initial living period, the better in order to make the best possible decision about home insurance. If you live in an area prone to natural disasters such as fire or flooding, then you should be more inclined to have home insurance.
Home Insurance As A Rental Property Owner
As an owner of three paid off rental properties, I feel better having rental property insurance because I don't know what my tenants are up to on a daily basis. Ever since renting out a main rental property to a bunch of guys who said they'd take care of the property but didn't, I've been more cautious.
It's only natural for homeowners to care more for their property than tenants. Therefore, owning home insurance on a rental property provides more value than owning home insurance on a primary residence. The rental property home insurance provides peace of mind, which is worth a lot!
That said, I'm considering dropping my vacation property insurance in Lake Tahoe now that the mortgage is paid off. The property is in a condo building / hotel with a lot of safety features. It is also a non-smoking unit.
Then again, given home insurance is a rental property expense, the cost isn't as high as home insurance for a primary residence, which isn't deductible.
One Final Home Insurance Cost Saving Strategy
If you have a recently remodeled home, you get better bang for your buck by getting an Actual Cash Value (ACV) home insurance policy. The reason why is because your home has less depreciation because it's new or newer. The value of a one-year-old roof is closer in cost to a new roof than a 30-year-old roof.
Hence, one money-saving strategy is to get an ACV policy for the first 10-20 years of owning your paid off home. When you start to feel your home is getting old, switch over to a Replacement Cost Value (RCV) home insurance policy. This way, if your house burns down, your 30-year old range and bathtub get replaced with brand new ones.
One couple I know went to Lake Tahoe for two weeks during a blizzard. Unbeknownst to them, while they were away, their home's roof leaked the entire time, destroying their bedrooms and kitchen.
Thankfully, they were thinking about doing a gut remodel anyway. Their RCV home insurance policy paid for the entire remodel, including the eight months of rent they had to pay for living elsewhere! It was as if their RCV policy paid for a new remodel.
Home Insurance Costs Add Up Over Time
I've owned real estate that I've purchased since 2003. Thankfully, I have yet to file a home insurance claim on any one of my properties. When there was damage, the cost to fix was below my deductible, so I just paid out of pocket. A high deductible is how home insurance companies keep claims at bay.
If I wasn't required to have home insurance due to having mortgages, I may have saved $100,000 in home insurance premiums by now. That $100,000 in savings could have been invested or set aside to pay for any future damages my properties may incur.
Home insurance companies are highly profitable for a reason. They take in more home insurance premiums than they pay out. Hence, you may want to invest in home insurance companies if you pay for home insurance.
Despite having a paid off home, you should also consider liability coverage. If you have a reckless teenager or throw a lot of parties, liability coverage is important. It helps protect your personal assets from costly lawsuits.
Beyond home insurance, look into getting an umbrella policy for more liability protection. The wealthier you get, the more you need to protect your assets.
My Home Insurance Savings Plan For A Paid Off House
The home I just bought with cash is less than 30% of my net worth. Therefore, I'm going to own an Actual Cash Value (ACV) home insurance policy for the next three years and then reassess. An ACV policy gives me peace of mind in case of a disaster as well as the satisfaction that I'm saving ~$1,200 a year in home insurance premiums.
My net worth would have to grow by ~150% for my home to get to 10% of my net worth. As a result, I will probably have an ACV home insurance policy for at least another 15 years. And over time, I will likely need to keep updating my coverage due to the hopeful increase in my home's value.
If in 15 years, my net worth does indeed grow by 150%, I won't have a problem dropping home insurance coverage. Then again, if my net worth really grows by that much, paying for home insurance won't feel like a financial burden.
With a paid off property, you have to decide how much peace of mind is worth to you. At the moment, peace of mind is worth a lot to me, which is why I'll continue to have home insurance for the foreseeable future.
Reader Questions
If you have a paid off property, what are your thoughts on getting home insurance? What is your experience with filing a home insurance claim? Besides percentage of net worth and time, what other metrics have you used to determine whether to get home insurance or not?
Why do people who don't have a paid off house and who don't have a house worth less than 10% of their net worth so against the consideration of dropping home insurance?
Suggestions
To invest in real estate passively without having to think about home insurance needs, check out Fundrise. Fundrise offers private real estate funds that predominantly invest in residential and industrial properties in the Sunbelt region.
With pent-up demand building, mortgage rates declining, and the stock market near all-time highs, I feel real estate prices are going to rebound in 2024 and beyond. Financial Samurai is an investor in Fundrise.
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I don’t see you addressing liability as part of the insurance consideration. Do you assume you would cover a potential serious liability situation out of your cash flow?
Hi Sam,
What are your thoughts on investing in a home in a high cost of living area when disaster insurance is increasingly hard to get? For example, I am thinking of relocating to Silicon Valley with young kids to be closer to family (not for work) though most family sized homes are 2.5m and up. In the back of my mind is earthquake risk and concerns about the impact a large earthquake would have on overall infrastructure and property values, along with an expected shortage of contractors if there was a large earthquake. I’ve also been hearing how insurance companies are no longer insuring against disasters in certain areas i.e. wildfire, hurricane. Would a lack of viable disaster insurance affect your real estate decisions?
Check out this post on home insurance for disasters.
We paid cash for our home which is 18% of NW. Our HOA requires us to carry homeowners insurance. We need to have homeowners insurance to have our umbrella policy, which I would not be without. So yes I have homeowners insurance, but am comfortable with a higher deductible. I filed one hail damage claim on a previous house (also paid-for) and had an excellent experience. When I deposited the check from the insurance company the banker told me we were lucky there was no mortgage company involved, and I’ll confess I didn’t really understand why but my takeaway from his explanation was that we had less red tape to deal with.
Great article on home insurance. We are being dropped because of our fire score (Colorado) and have been considering not reinsuring. Also we had major hail damage ($142K) so everything is new. In the big picture a $5,000 a year premium for an ACV policy for peace of mind is not a bad idea even if we are in the 20% of net worth!
Thanks FS!
Hi Rick, I’m glad you got $142K of insurance coverage from hail damage before you got dropped! Weather and nature really does wreak so much havoc. Best of luck.
Owned a home (free & clear) in FL for 31 years & when insurance premiums went from $350/yr to $3200 we cancelled. Sold it in 2022 & moved our winter respite to Scottsdale AZ. Ins there reasonable, so we have it now on an expensive free & clear home.
But my FL neighbor also cancelled his insurance, but soon after repaired his own HVAC & @ 2am the home burned & he simply walked away from it.
However, we do insure our free & clear rentals (with maximum deductibles), to get the required tenant etc liability (tax deductible) insurance plus we have a balloon.
20 years ago a higher end rental property had an ice damaged 8ft bay window replaced. The insurance ($475 p.a. $500 deductible) covered the $5k replacement, then they dropped us??? What surprised me is the fact we only had their coverage for a couple of years, so they never recovered the payout??? We still own that property with insurance now @ $1400/yr, but have had it rented it to the Coast Guard for 18 years.
After a high wind storm we had another rental sustain penetrating roof damage from a large branch going through it. The branch was not from any neighboring trees???
The carrier denied the claim, so we replaced the entire roof, 13 layers plus sheeting (circa 1823) for $10,500 then sold the property for a great profit.
I would like to share that the “remodeled” newer home idea sounds good but I am experiencing quite the opposite with trying to get insurance. I have an antique business in a small original 1920’s home – for 27 years now. Back in 2022, it had a fire that was attributed to electrical but I suspect it was the 21st century new laptop that caused it. No matter, we had no insurance. So we (my sister, her husband, myself and my husband) took on the task of interior demolition, rebuilding, rewiring and completed the entire job in 10 months with city permits. Once it had been updated to 21st century technology, wiring, sheetrock, plumbing, etc. “Because all the new was housed in a 126 year old home (shell) – insurance doesn’t want to insure it. The original home plays an important part being located on an original stretch of Route 66 that runs through Texas. Route 66 celebrates it’s 100th Anniversary in 2026. From the trouble of trying to get insurance, I understand more and more why historic buildings with character are torn down everyday to be replaced with cheaper plain square featureless structures.
This is great! I would love to see this thinking applied to life insurance. In my early fifties, house paid off 17 years ago, college for three kids covered, no debt. House is 21% of net worth. I will keep homeowners insurance but what about 10 year term life insurance $2,000,000 at $1600 per month (used policygenius)? I think having that until 60s makes sense to augment and support spouse and family….. Not sure how you do those calculations with respect to life insurance needed.
$1,600 a month is steep. Typo perhaps?
With Jo debt and college for three kids covered, not sure you need $2 million. Maybe $500K to minimize your beneficiaries having to sell anything.
Interesting discussion. Here’s the non-FI take on the same logic: My investment property is 174 years old and was rehabbed significantly and needs work all the time, but I never file claims. The market value is $220K, but because it is an historic house and basically irreplaceable, the RCV insurance was way too expensive. I seem to have a hybrid policy that is RCV “up to the limit of the policy” which is $500K. I do feel stress a lot as a landlord. Primarily because I’m not a professional handyman and don’t know how to fix many things and have to wait for others to address significant repairs. Using your article that suggested the addition of the NPV of my education, which supports my day job (which I enjoy), my net worth is $1.4M (50% of which is the NPV of my education, 30% is my primary residence), so my rental property equity is only 5% of my net worth right now. Therefore, even though I must have insurance, I’m going to try only to invest 5% of my emotional energy in it to try to keep my sanity!
I have a wholly owned custom made house that we never insured. I avoid all non-mandatory insurance and over my 86 years of living this habit has made a significant contribution to my estate. My relatives generally do buy insurance but are often dismayed at the failure of the companies to pay as much as was anticipated when they are needed. In addition to any insurance purchases, the buyer should also anticipate a cost to hire a law firm to press a legitimate claim. Insurance companies have deep pockets when it comes to legal battles.
Consider a high deductible depending on the premium savings
Hi Sam, Based on my experience check the policy especially after payoff and property tax bill.
The annual property tax bill yields this information.
The whole real estate package value is $500,000 items $300,000 house and $200,000 land.
I said to insurance agent the house is $300,000 the land is $200,000 CORRECT ? Answer yes.
So insurance agent I want to insure the $300,000 house, replacement value of house and contents.
So most of America is spending 1/3 or 1/2 of house owner insurance to insure dirt.
This is advanced 4th grade arithmetic and reading documents that show up every year in mailbox.
So buy the burn down insurance excluding dirt.
Keep SMiling Steve
Built a brand new house in 2021, got hailed out with around $23k in damages in 2023. Had insurance but had to pay the $1k deductible. Just my luck.
Sounds unlucky by lucky! Glad you had insurance. But if your brand new house was less than 10% of your net worth, I’m assuming you could pay that $23K out of pocket without too much problem.
I see it in reverse. if i have paid off my house partially for the peace of mind and good feeling, forgoing the possible financial opportunity of putting that money in the market, i don’t want to skimp on $500 per year and risk losing it all in a disaster. Seems like backwards thinking. if i have a 8 million NW and a 800k house, paying $500 per year seems like an awfully small price.
Maybe, if home insurance is only $500 a year. But it’s probably not that cheap, which is part of the point.
What percentage of your net worth is your home’s value? This will help me get a better sense of where you are coming from.
If you indeed have a paid off $800K home with an $8 million net worth, I’m saying you can self insure and aren’t worried much about total destruction. You may happily want to rebuild your home, especially if it’s old.
those are my NW and house value (zillow says 855k but usually overestimate). I pay 500 a year with allstate. probably discounted because i also have car, life, and umbrella with them. package deal discounts. but even if 1000 a year id pay it. In NVA.
Gotcha. Thanks for sharing. $500 is a good deal then.
That depend of ur state my house is 400 k, paying 4800 for insurance in 2023, very likely about 5500 for 2024, the decision to pay insurance for a home in Florida is tough.
“It’s common to lose 10% or more in the value of your stock holdings in any given year. As a result, losing 10% of your net worth in a natural disaster will feel like par for the course.”
I disagree with this argument. When you lose 10% in the value of your stock holdings, you expect these holdings to eventually recover – in a year or two or five. If you lose your house which is 10% of your net worth — this is gone forever. Unlike S&P500 it will never come back.
That’s true. But here’s the thing. How many times will you lose 100% of the value of your property? Almost never, even if your house burns down. Why? Because land value is often the majority value of a property.
What percentage of your net worth of your home is your net worth? I’m trying to understand whether those who disagree with my logic actually have their home’s value as 10% or less of their net worth or not.
thx
Sam, I take my words back. My house is more than 10% of my NW. I just did a mental exercise where the value of my house decreased to 10% of my NW with the NW remaining the same OR my NW increased dramatically where the current value of my house became just 10% of my NW. You are right — in both cases, I would not care if the house burns down.
OK, thanks for clarifying. But you do make a good point about the S&P 500 bouncing back over the long term compared to a house which does not regenerate on its own.
While not in insurance myself, I will share the main thing that stuck with me from my insurance classes while getting a finance/accounting degree – you insure your house and you don’t insure your toaster. I think you might be arguing that sometimes we care about a house as much as we’d care about a toaster…
I understand your argument about the emotional aspect of perhaps caring less about a loss when it’s a less/in significant part of your net worth. But as others point out, there’s a huge tail risk that you’re protecting yourself from and not doing so given an easily available means to do so (without giving up your upside) does not seem like prudent risk/asset management. I think a natural extension of your argument might be that you shouldn’t spend money on maintaining your house either. I’d guess you probably wouldn’t advocate for that?
The other thing I’ll add is that if you won’t be too financially upset by the property loss, then you definitely won’t be that put out by the cost of the insurance (e.g. the $1200 savings you’re getting on a million dollar home).
FWIW: we’ve carried typical home / liability insurance on a rental property we purchased with cash and had the luck of the draw in having to file a roof leak claim in the first year of owning our primary home ($20k in expenses covered by a $1k home insurance policy)
“I think a natural extension of your argument might be that you shouldn’t spend money on maintaining your house either. I’d guess you probably wouldn’t advocate for that?”
The choice is up to you whether you want to maintain your house or not. Clearly, you see a lot of houses that haven’t been maintained or updated.
What percentage of your net worth is the value of your house? And when did you pay it off?
Congrats on your roof leak and spending $1K!
The rental we bought cash was probably around 10% of our net worth at the time. Now <3%. Haven't had to tap into the insurance on this one. Will probably increase the deductible on it per some of the other comments.
Good thing to regularly reconsider though… Figuring out an optimal % of property value to spend on insurance might be an interesting exercise
Our residence is not paid off yet
Ok. Maybe once you’ve paid off your property and it’s below 10% of your net worth you might have a different opinion. Let me know when you get there and if you do.
As I wrote in my article, insurance on a rental is better value.
In (1) “Get home insurance if the home’s value is greater than 30% of your net worth”, is home value also either RCV or ACV rather than total value of the home? I imagine in a place like SF, over 70% of a home’s value is in the land which cannot be destroyed by a disaster.
I use overall value of the home, ie how much it would cost to buy the property.
I had a forty-two year career as a owner of an independent insurance agency. The misconceptions that I see in many of the comments are too innumerable for me to address here. I did not sell insurance to people. I helped them make an informed decision on what they wanted to buy. In the field of Risk Management insurance is just one approach that is used in forming a Risk Management program. Everyone has unique circumstances that require different approaches. Since most of the comments revolved around property insurance, I would suggest that many policyholders can benefit from increasing their deductible i.e. $10,000 $25,000 $50,000 or more.
Earthquake and Flood insurance already employ substantial deductibles in their coverage. I am encouraged to see the number of comments that mention a Personal Liability Umbrella policy. Personal liability coverage is usually not very expensive. Does your agent communicate with you on a regular basis? Has your agent acquired any insurance designations? Some designations are CPCU or CIC. I obtained my CPCU designation the early 80’s and the exams were strenuous. I also obtained other higher types of licenses. This shows a dedication to the insurance industry. I wish everyone the best in tailoring a Risk Management program that fits YOUR needs. I urge you to be careful and fully understand the liability that you are assuming.
Totally agree and well said! I’ve been a licensed independent agent since 1978. I’ve seen our companies pay millions of dollars in homeowners claims. It is not worth the risk to assume the loss of your home and personal property vs. the cost of the homeowner insurance. Poor financial and risk management advice in this article.
As an insurance agent, do you think you have any bias for encouraging people to get insurance, no matter what?
If not, can you share with me your thought process of why, not insuring a paid off home that is less than 10% of your net worth such a bad idea?
I’m not talking about the typical American with 70% plus of their net worth tied up in a home. Thx
Excellent post and accurate. Insurance is crated for personal situations and risk tolerances. I think of it as tail risk protection (except car insurance) and pay the option knowing it’s likely to expire each year worthless.
Umbrella is the most important insurance I currently have.
There is a price for everything.
If home insurance rates get too high, then fewer owners with paid off mortgages will get insurance.
This article is a discussion on price discovery.
Hi Sam, Eastern shore of Maryland Talbot county expenses.
House & 2 acres value $500,000
House owners insurance $1,400
Umbrella insurance $470
2 autos value 20k insurance $1,600
AHS American Home Shield insurance $1,500 recent large increase.
Example summer 2023 replace HVAC system 9K AHS paid 5K.
Different subject business insurance employee took $100,000 with police report insurance paid $50,000.
“Actual Cash Value (ACV) – A cheaper home insurance policy that replaces the *value of your destroyed home* and personal items after depreciation.”
===
I understand the difference between RCV and ACV when it comes the roof example.
But how do they figure out the total cost of rebuilding an entire house — let’s say the house is destroyed by a tornado. Do they go over each sub-structure of the house as in the roof example and calculate the depreciated value for each?
We have gotten used to thinking that a house is an appreciating asset. Isn’t the “value of your destroyed home” somewhat reflected by its value seen on, for example, Zillow, Redfin, etc.?
An estimator will come out to determine. Good to have before videos and pictures.
Cost to rebuild minus depreciation.
There will definitely be subjectivity and perhaps even negotiating involved.
Just chiming in to say we have a paid off house that is ~20% of our net worth and we carry insurance. In fact I just upped the replacement value not too long ago. It’s relatively cheap (.07% of home value) due to being in the Bay Area (no tornados or flooding). Cheap fire insurance in essence. Do not do the significantly more expensive earthquake insurance. Overall I see it as a cheap hedge on our most expensive single asset.
I do think you can axe life insurance once you’re into FI, and I do think it pays to carry umbrella insurance. It also is good to review insurance generally every few years.
That’s the irony. The less risk, the cheaper the home insurance risk, and also the less you need home insurance.
This issue has been on my mind also. I have three homes, one inherited and the whole house is 43 years old and quite dated but paid for. One vacation property that is hitting the 30 year mark but is in a wildfire zone and could cost a lot to replace and has a mortgage. The third home was purchased with cash and has a new roof but the rest of the structure is 60+ years old and needs new bathrooms and kitchens. I found that the land is the biggest part of the assessed value. Thanks for crunching the numbers.
Good luck with your decisions.
Yes, land is the most valuable part of real estate. Structures can be built and structures get old.
Hence, one of the reasons why I bought my new place is because it is on a more than triple lot. Land is massive for the city. I couldn’t believe it.
I had no idea about ACV versus RCV until I read your comparison post in September. I have RCV now but plan to switch to ACV after I do some remodeling in a couple years. And I never even thought about not paying for home insurance at all after paying off the mortgage. Thank you for always teaching me new things and offering new perspectives and possibilities.
It’s unlikely I would ever drop home insurance in the short term, but perhaps I could see myself considering it in about 10 years once my house is fully paid off and my net worth has grown larger. But your line about the cost of insurance being less of a big deal the richer one gets and the smaller the % the house is of one’s net worth makes sense too. If it’s relatively less and less expensive over time, I could see myself saying something like “oh I’ll just keep it, why not.”
Congratulations on your new home, Sam. I continue to try and build my wealth and appreciate all your stories and inspiration over the years.
For the 15+ years that I have owned rental properties I have never even considered not having property and liability insurance on them. It simply never crossed my mind. After reading your article I realize that USAA has been making a killing off of me. Most of the properties have been paid off for over a decade. And like you, I have made hardly any claims. One year I had 4 roofs replaced when a hail storm hit the area for full replacement cost. I was glad I was insured then.
I will reevaluate my rental property insurance needs now. However, I know I must keep liability insurance on the rentals. I’m not willing to assume that risk. Additionally, I have an umbrella policy with USAA which requires that the insured assets also maintain minimum property insurance. USAA may allow me to reduce the policy to an ACV and still have the umbrella.
I would love your thoughts on the following scenario:
My father dropped the insurance on his home several years ago based using your same logic given that the value was less than 10% of his networth. He passed last year and my mother lives alone in the same home. My brother and I do not live nearby so in the event of a disaster, my mother, who is 89 and in very good health, would be on her own initially (until my brother or I could get back) to sort out the mess. Both my brother and I strongly recommended she get home insurance so that she would have someone to help sort out the repairs, etc. Given her age, we are very concerned that contractors, etc. would immediately try to take advantage of her. Do you think this was a prudent decision? Or given the value of the home is still less than 10% of her networth, that it really is not a good investment decision? I live in Mexico and I have never had to deal with home insurance claims in the US so my assumptions may be completely wrong.
I think you have a gap if you don’t have at least liability protection. Umbrella insurance picks up where regular insurance stops. As a wealthy person, you must think about liability because if anything happens even if not your fault, you are a target. Judgement proof people don’t have to worry about insurance. Everyone else with any kind of assets needs to. Sam is correct about three points: a) the RCV-ACV discussion is important, b) the liability insurance comment, and c) the rental rider while your home is being rebuilt is very important to have (not used it at all but I get a year of living expenses with the family including dogs paid for).
One thing in life is certain….sh*t is going to happen, it’s not a matter of if, it’s a matter of when….insurance is there to typically cover you when that sh*t happens, without insurance you’re swimming in sh*t if something goes wrong, whether your wealthy or not HOI is a good idea…. if you’re well off the downside risk probably outweighs the benefits of the premium savings. If your home is less than 10% of your net worth, what’s a few grand on an insurance policy to you. Most people aren’t buying a lambo and driving it off the lot without collision coverage. This blog is filled with good intent and good advice, but I can’t same the same is true on this one.
What’s your recommendation if you have a paid off home? And do you have a paid off home? If so, what is your home insurance policy. Have you ever had to file a claim? If so, for what?
Thanks
For the super wealthy Lambo buyer example, insurance is more from a liability side to protect assets in case they cause an accident, not so much to cover the cost to fix the car. Umbrella policy very important.
I have gone through the same thought process re-evaluating insurance as you Sam.
Our home is worth less than 10% of our net worth with no debt. I did get home insurance on it, but with the highest deductible and lowest replacement value possible. The only reason I got it was for the liability and the fact that umbrella insurance generally requires homeowner’s liability.
To me, liability is the biggie. We have substantial assets and would be a target for sleazy lawyers. Our house could burn down and it would sting, but we’d be fine. The loss is a known limit.
With liability the risk is far greater, and no upper limit.
If you can absorb the loss there really is no case for asset loss insurance at all. It’s the same for auto insurance. If you can afford your car being totaled, you’re better off just getting liability (which I’ve maxed out on auto) and uninsured motorist and not getting collision or comprehensive.
I’ve found that most people do not think of risk properly, e.g. “I got the zero deductible plan because I want the insurance company to pay everything!” It’s financial and risk illiteracy. They don’t realize that they are paying dearly for that coverage, far in excess of the expected value of the loss. The insurance company is making a profit on them even covering their overhead. Let that sink in.
Not once in 30 years have I filed a claim for auto or homeowners. I know the risks and they’re tiny in our case. I can absorb the asset loss if a black swan event occurs. It makes sense only to hold liability.
Now do a post on title insurance, Sam. Biggest homebuyer scam ever.
I don’t see how the debt status should play a roll in the decision. If anything having a paid off home is even more exposure and more reason to have HOI. If I have a 300K with a 250K mortgage on it the most I could lose is 50K in equity in the result of a total loss. If my home is paid off that’s 300K I could lose. I have 300K to lose, but that doesn’t mean I want to risk losing it.
Own multiple paid off homes, still keep insurance on all of them. The liability issues are substantial with rentals, suits from tenants, contractors, neighbors etc. But yes umbrella could be fine for that. I’ve had to file a claim on our primary residence got a 23K roof out of it, paid for the premium half the time we’ll be in this home.
Sounds good. What percentage of your net worth is your paid off primary residence?