Going without homeowners insurance may seem like a good way to save money. After all, monthly premiums must be paid for insurance coverage and those premiums average $2,305 per year. That's a lot of cash.
In reality, though, making this choice could be a financial disaster. Here's why it doesn't pay to go without a policy.
Mortgage lenders won't allow it
Any homeowner with a loan on their property absolutely cannot go without homeowners insurance. Their mortgage lender will not allow it. Lenders require dwelling coverage to pay to repair or replace the home, since the house is collateral securing the loan.
Lenders will require proof of insurance before closing on a home. And while a homeowner may try to cancel coverage after closing -- even though they shouldn't -- this usually isn't possible.
Many lenders require homeowners to include a monthly payment toward their insurance costs in each mortgage payment. This money is put into an escrow account, and the lender pays the insurer out of it when premiums are due.
Even when this isn't the case, a mortgage lender is notified when a policy is canceled. The lender could buy expensive insurance, called force-placed or lender-placed coverage, to replace the canceled policy. Or, in some cases, the failure to maintain coverage will be a violation of the loan agreement that could prompt the lender to initiate foreclosure proceedings.
It's not worth risking the forced purchase of an expensive policy or even the threat of foreclosure just to save on insurance premiums. Homeowners should not consider doing that.
It's a bad idea even without a loan
People who don't have a mortgage won't have a lender mandating they get covered. But even homeowners who have a paid-off property can't afford not to have coverage.
Without homeowners insurance, a property owner would have to pay out of their own pocket for any disaster. They might have to replace the home with no help after devastating events, like a fire. With new home construction costing as much as $100 to $200 per square foot on average (according to data amassed by Quicken Loans), this could get expensive very quickly -- especially on larger properties.
Homeowners insurance should also provide coverage for more than just the dwelling (even though that's all lenders usually require). It's a good idea to buy liability coverage to pay damages in case someone gets hurt on the property, as well as personal property protection to pay for possessions at the home.
Most people simply cannot afford to replace every item they own if it is destroyed by a disaster at the house. And if someone is hurt or killed and the property owner incurs legal fees and is required to pay thousands -- or millions -- in damages, this would be a huge financial obstacle without insurance.
Because liability and personal property coverage are so important, people not only shouldn't go without coverage but they should buy more than the minimum a lender would require. Anyone who can't afford to rebuild their house and replace everything they own without struggling financially should contact a home insurer to make sure they have comprehensive homeowners insurance coverage in place today.
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FAQs
It's a bad idea even without a loan
Is having home insurance worth it? ›
In a worst-case scenario, you could lose your entire investment. Keeping your homeowners insurance in good standing is a good way to ensure you'll be able to cover the costs to repair and/or replace your home and belongings if they are damaged by a covered loss.
Why is home insurance so important? ›
Homeowners insurance is important because it protects consumers' homes and personal property. In the event of a total loss, insurance can provide the primary source of rebuilding funds. It also provides liability coverage for legal actions from injuries or damage from another person on their property.
What are the negatives of making a house insurance claim? ›
Cons of Filing a Homeowners Insurance Claim
- Deductibles Apply: When filing a claim, you'll have to pay a deductible amount out of pocket before your insurance kicks in. ...
- Potential Premium Increases: Filing frequent claims or claims for significant amounts can lead to increased insurance premiums over time.
Cons of Home Insurance:
- Cost: One of the primary drawbacks is the cost of home insurance. ...
- Deductibles: Home insurance policies often come with deductibles, which means you need to pay a certain amount out of pocket before the insurance coverage kicks in.
If you fail to purchase coverage or let it lapse, your company may send your mortgage into default. Alternatively, the lender could choose to buy a policy on your behalf.
Is property insurance mandatory? ›
When it comes to home loans, you must have heard that purchasing home insurance is also needed. Well, as per the Reserve Bank of India, IRDAI, home insurance against home loans is not mandatory. It is completely under your discretion, and a financial institution cannot force you to invest in property insurance.
Is it bad to not have home insurance? ›
If there is a natural disaster or other unexpected event that damages your home, it will be expensive to repair or rebuild. Without insurance coverage, you may simply not be able to cover these costs, so you could lose your home and all the money you had tied up in it.
Is it really important to have insurance? ›
Insurance is a financial safety net, helping you and your loved ones recover after something bad happens — such as a fire, theft, lawsuit or car accident.
Does homeowners insurance pay off your mortgage if the house is lost? ›
If a covered disaster completely destroys your house, your standard homeowner's insurance policy includes a "loss of use" or "additional living expense" protection, providing temporary housing until you recover. It pays off your mortgage, freeing you of that obligation.
Avoid admitting fault or underestimating damages as this might lead to lower compensation or even denial of your claim. Honesty is crucial when dealing with an insurance adjuster, so avoid providing false information which can lead to serious consequences like claim denial or legal repercussions.
Why is a house uninsurable? ›
Many homes in Southern California, for example, are uninsurable, “mostly due to the proliferation of wildfires and mudslides in the region,” Maureen McDermut, a realtor with Sotheby's International in Montecito (a Santa Barbara town), tells Fortune.
Is it worth claiming on home insurance? ›
If something happens to your home, it's worth thinking about whether you could afford to cover the cost yourself instead of claiming on your home insurance. This can protect your no-claims discount and help to avoid an unnecessary rise in your premiums.
Is house insurance even worth it? ›
Home insurance protects your house
So if a huge unexpected disaster takes place, like a fire or windstorm, you'll save hundreds of thousands (or millions depending on your house size) on out-of-pocket expenses.
What would happen if a homeowner had no homeowners insurance? ›
Without this coverage, lenders can withhold payments or even deny loans altogether. Not having homeowners insurance can also have financial implications beyond just legal ones. If an accident or disaster were to occur, the homeowner would be responsible for paying for all repairs and replacements out-of-pocket.
Should I cancel my home insurance? ›
Although most home decisions depend on your circ*mstances, there's really only one answer here: You should cancel your home insurance after you officially close the sale of your house. Mortgage lenders require you to have home insurance for your property for as long as you have a mortgage.
Is it smart not to have homeowners insurance? ›
Homeowners insurance will offer ongoing financial protection
Will all the money and care you've invested in your home—and life—it's advisable to guard against financial risk and always keep a homeowners policy in force.
Why don't people have home insurance? ›
“Many consumers are struggling to afford rising premiums and must go without homeowners insurance,” said Sharon Cornelissen, the Consumer Federation of America's director of housing and co-author of the report.
Should you insure your home to its full value? ›
Replacement cost is how much it would cost to reconstruct your home as it is now, and most homeowners policies offer replacement cost coverage. However, if you don't insure to the full value of your home, you may find yourself responsible for a significant portion of the rebuilding costs in the event of a loss.
