How I Measure the Risk of Self Insuring a House

Be honest with yourself. Do you really need insurance? If so, how much? Despite costs dropping the past few years the insurance doesn’t feel like a good deal many times. So how do you determine if self insurance is right for you?

If you have a mortgage then you must get at least the minimum coverage required by the loan provider. Sorry, there is no get out of jail free card but you already knew that didn’t you…

So what if you paid cash? Nobody is making you insure the home so it is your decision to make. I recommend using a break-even analysis. If your home is worth $50,000 and it costs $1,000/year to insure it, then it would take 50 years of paying premium to equal out a complete loss. In this situation you have high risk with low reward — insurance should probably be part of your risk management plan. 

If that same house cost $10,000/year to insure you would break even after only 5 years. Would you be willing to bet that a claim (a complete loss at that) would occur in the next five years? Statistically the odds are in your favor. This would be a time to consider increasing deductibles, removing wind coverage, or taking reduced coverage so you can still minimize your risk but in a more affordable manner.

The break-even analysis is also a great tool to determine whether you should increase your deductibles to reduce premium. What are the odds of having a claim before your break even point? If you feel a claim is likely to occur before the break-even point then keep the deductibles low. If you feel confident of being claim free until after the break-even point then raise the deductibles and reap your savings!

At the end of the day the decision to self-insure will be a personal one that considers your current liquidity, overall asset portfolio and risk tolerance.  If you are still unsure you can consult with an experienced insurance agent to help determine the right policy for you.