Can you self-insure your home?

Should you self-insure your home?

Self-insurance is an alternative to traditional homeowners insurance, but it’s not for everyone; in fact, it’s not for most people. Self-insuring your home is risky unless you have significant savings for repairs or injuries.

While self-insurance saves homeowners on expensive home insurance premiums, it puts the entire financial burden of damages or injuries on the property owner. If a major event occurs, such as a fire or a severe storm, the homeowner is responsible for all the costs. It's important to consider these risks before deciding to self-insure. 

Self-insurance is a viable option for people who own their home outright and have significant savings. It isn’t a good option for homeowners on a tight budget who are considering dropping coverage to save money. 

Additionally, most lenders require home insurance, so you can’t self-insure if you have a mortgage or home equity loan. 

What does it mean to self-insure your home?

Self-insuring your home means you don’t have a traditional homeowners insurance policy. Instead, you plan to pay for damages or injuries out of pocket.

“Self-insuring your home means choosing not to purchase a traditional homeowners insurance policy and instead covering potential losses out-of-pocket,” says Shiloh Elliott, press secretary for the Florida Office of Insurance Regulation. “This approach comes with significant risks and should only be considered by homeowners with significant financial resources who can rebuild, unassisted, without financial hardship, and who own their home outright.”

If you live in an area with high homeowners insurance premiums or few insurance carrier options, it might be tempting to forgo coverage on your property. Doing so comes with high risks. 

With a traditional home insurance policy, you pay the insurer a premium. In exchange, it pays for damages to your home that are covered by the policy, and you pay only your deductible. When you self-insure, you’re responsible for all costs an insurer would have helped cover.

For example, let’s say a hailstorm damages your roof, and repairs cost $25,000. If your homeowners insurance policy has a $1,000 deductible, your insurer will pay $24,000 for roof replacement and you’ll pay $1,000. However, you’re responsible for the entire $25,000 bill if you're self-insured.

Can you self-insure your home?

You can self-insure your property under certain circumstances. If you have a mortgage, your lender will require you to carry a traditional insurance policy. Homeowners without a loan may choose to self-insure.

Typically, self-insurance is for homeowners with a significant income or sufficient funds on hand to cover the cost of repairing or replacing your home and any personal injuries for which you are responsible. Since you will be responsible for these costs, having a financial cushion is important. Wealthy homeowners tend to be able to afford the risks more than homeowners on a tight budget.

Keep in mind that any homeowner without a loan on their property may self-insure, but not all can afford the costs associated with the risk.

Who can consider self-insuring their home?

If you own your property outright, you’re a good candidate for self-insuring your home. However, since most lenders require insurance if you have a mortgage, you won’t have the option to self-insure with a mortgage.

“OIR does not receive data related to the number of uninsured homeowners; however, it should be noted most lenders providing mortgages require consumers to purchase property insurance. In those cases, if a consumer does not obtain or maintain homeowners' insurance, their lender may purchase it for them since loan contracts usually require it. This is typically called lender-placed or force-placed insurance,” Elliot says.

Also, you must have enough money readily available to cover a catastrophic loss. For example, if a tornado destroys your home, you must have enough money to rebuild. Other devastating losses could include a major fire, a severe storm or a significant personal injury on your property. It's important to be prepared for these potential scenarios when considering self-insurance. 

Self-insurance isn’t a good option for a homeowner who doesn’t have access to a large amount of cash should damages occur. Although it might be tempting to cancel an insurance policy with a high premium, you also need to be prepared to handle significant financial burdens if the worst happens.

Pros and cons of self-insurance

As with anything, there are pros and cons to self-insuring your property. Consider each one and decide if self-insurance is right for you.

Pros of self-insuring your home include:

• You will save the insurance premium paid to your insurer; if nothing ever happens, you keep that money.
• You can decide when and how repairs are made to your home.
• You pick your contractor, and repairs can be completed within your timeline.
• There’s no back and forth with an insurer, meaning no headaches or delays.

Cons of self-insurance include:

• You are financially responsible for damage to your property and have no liability coverage.
• Costs could be significantly more than the money you’ve set aside.
• You may have to acquire debt to pay any associated expenses if you don’t have enough savings.
• Your mortgage company may force-place an insurance policy if you don’t carry one as required by your loan agreement.

How to self-insure your home

If you self-insure your home, there are important steps to take to limit your risk.

First, it's crucial to realistically calculate how much it would cost to replace your home and everything in it. This cautious approach will help you limit your risk and be prepared for any eventuality.

Not only will you be responsible for rebuilding your home, but you’ll also need to replace the contents, including art, jewelry, electronics, furniture, and other valuables. You’ll need to include these costs in your estimate.

Next, decide how much you should set aside based on your estimate. Ideally, you could invest a significant amount of money to begin with in case damages occur early in the process of saving. 

Finally, create a savings or investment account with the sole purpose of paying for any damages or injuries that occur on your property. Many homeowners start with a large amount and then add the amount they would pay in premiums annually. 

Helpful home insurance tools and calculators

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• When to file a home insurance claim