Can you self-insure your home? Insurance.com

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 most suitable for people who own their home outright and have significant savings. It is not 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 do not have a traditional homeowners insurance policy. Instead, you accept responsibility for paying out of pocket for damage to your home and other structures, replacing your belongings, covering temporary living expenses and handling liability claims, including related legal costs and damages.

“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 carrier options, you might consider going without coverage. However, doing so carries significant risks. With a traditional policy, you pay a premium, and the insurer covers eligible damage after your deductible. When you self-insure, you pay all those costs yourself.

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.

PEOPLE ASK

What’s the difference between self-insured and uninsured?

Someone who is self-insured has a plan to pay for damages out-of-pocket, while someone who is uninsured has no insurance plan at all. Technically, self-insured people are also uninsured, in the sense that they have not purchased an insurance policy, but they don’t face the same risks.

Can you self-insure your home?

You can self-insure your property if you own your home outright and no contract requires you to carry insurance. If you have a mortgage or home equity loan, your lender will require property insurance as a condition of the loan agreement.

It may be worth considering only if you can afford to pay for:

A complete rebuild after a major fire or storm
Repairs to other structures
Replacement of your belongings
Temporary housing
Debris removal
Medical bills and legal costs from a liability claim

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.

PEOPLE ASK

When should I self-insure my home?

If you don’t have a mortgage or loan and have a significant amount of cash on hand, you can self-insure your home, but all of that savings will be put at risk.

Who can consider self-insuring their home?

Self-insurance may be an option for homeowners who own their property outright, have substantial savings and can afford a complete rebuild, replacement of their belongings, temporary housing and a large liability claim. A tornado, major fire or severe storm could destroy your home, and rebuilding may take months or longer.

“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.

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

Self-insurance has one main financial benefit: You keep the money you would have spent on premiums. However, you also assume full responsibility for every loss. A major fire, severe storm or liability claim could cost far more than the premiums you save, potentially creating significant financial hardship.

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

Self-insurance requires more than saving a few years of premiums. You need enough savings to cover the largest realistic loss you could face, including the cost of rebuilding your home, replacing your belongings, paying for temporary housing and covering liability claims out of pocket. Review the fund regularly because construction costs and the value of your belongings can change over time.

Follow these steps:

1. Calculate your home’s replacement cost

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.

2. Calculate the cost to replace your belongings and cover other expenses

Estimate the cost to replace everything inside your home, including:

Furniture
Electronics
Clothing
Appliances
Jewelry
Artwork
Tools
Other valuables

Create a home inventory with photographs, receipts and estimated replacement costs. Update it after major purchases.

Also account for the possibility of injuries or property damage for which you are legally liable. A serious liability claim could include medical expenses, legal defense costs, settlement costs, court-ordered damages and other compensation. Because liability claims are difficult to predict, consider whether your finances could withstand a large claim.

A major loss could make your home uninhabitable for months, so budget for a hotel or rental housing, meals, storage, transportation, pet boarding and other relocation expenses. Construction delays, permitting problems and contractor shortages can extend the time you need alternative housing.

3. Set aside enough money to cover a major loss

Create a separate savings or investment account for your self-insurance fund.

The money should be:

Accessible after a disaster
Separate from everyday spending
Large enough to cover a major loss
Reviewed as costs change

Many homeowners start with a large amount and then add the amount they would pay in premiums annually.

FAQ: Self-insurance for your home

Is self-insuring legal, and are there any regulations I should know about?

Yes, it is legal to self-insure your home. However, if you have a mortgage or equity loan, your lender will probably require you to carry homeowners insurance.

What types of homeowners are best suited for self-insurance?

Homeowners who own their homes and have substantial savings may consider self-insuring. However, homeowners with a mortgage or who can’t afford repairs after a catastrophic loss should purchase an insurance policy.

How do I set up and manage a home self-insurance fund?

A self-insurance fund can be as simple as a savings or investment account. Start by estimating your home’s rebuilding cost, the replacement cost of your belongings, temporary housing, liability and legal costs, debris removal and other expenses. Keep the money in a separate account you can access quickly and review the amount regularly as costs change.