There are a lot of costs associated with owning a home besides your mortgage premium. You have utilities, maintenance and repair costs, property taxes, homeowner’s insurance, and possibly an HOA (homeowners association) fee and/or private mortgage insurance. It’s not uncommon to look for ways to reduce your costs. You might ask yourself, “Do I really need homeowners insurance? What are the odds something bad could happen to my house? Is it okay to forgo it for a bit to save some funds?”
Or perhaps you own your home free and clear. Does homeowners insurance make sense now that the property is 100% rightfully yours? How not having insurance could affect you depends on your status as an owner (whether you’re still paying off your mortgage or not) and the issues that may arise such as a break-in, natural disaster, or injury on your property.
Before you cancel your policy, let’s examine a few scenarios that could happen if you don’t have homeowners insurance. That way you can make an informed decision about whether the monthly premium is worth it.
Am I required to have homeowners insurance?
Good question! If you own your home outright (meaning you’ve paid off your mortgage completely), you aren’t legally required to have homeowners insurance. This fact often comes as a surprise to homeowners, as we tend to equate property insurance with car insurance. However, if your home is 100% yours, no insurance is required…but you’ll assume all risk for any disaster that happens to or on your property (more on that below).
If you have a mortgage, your lender will most likely require you to have homeowners insurance. Why? Without coverage, you’re at higher risk of defaulting on your loan if disaster strikes. Without homeowners insurance, you’ll need to pay for any major damages or to rebuild your home out of pocket. In this scenario, few people would be able to pay off their mortgage as well as rebuild. Your mortgage lender will likely require proof of insurance before closing. The amount you’ll need to be insured for will vary but is typically the balance of your loan or higher.
Here are some possible outcomes if you decide to get rid of your insurance policy.
1. Your mortgage lender could send your loan into default
You know you’ll most likely be required to have homeowners insurance at closing, but what happens if you cancel your policy after you’ve closed on the property? Well, your lender will require insurance throughout the life of your loan — it’s not just a requirement to close on your house. So, if you cancel it while you still have a mortgage, you’ll be in violation of the terms of the loan.
Your home insurance provider will notify your lender that the policy has been cancelled. Your lender may choose to find a new insurer for you (this is called “lender-placed” or “force-placed insurance”), and the premium may be higher than what you paid with your previous policy. It may also fail to cover everything that matters to you, such as your personal belongings, as the loss of these items does not affect the mortgage lender.
Your mortgage lender could also send your loan into default. From there, you risk losing the property altogether to foreclosure. Your credit score will also take a major hit.
If you want to cancel your policy so you can change insurance providers, make sure you have that new policy in place before you cancel the old one. Otherwise, you’ll have a lapse in coverage, which will violate your mortgage agreement and could put you in unfortunate circumstances if something occurs during the time your property was uninsured.
2. You might have difficulty selling your house when the time comes
If you don’t have a mortgage, you can sell your house without an insurance policy on it. Still, it’ll make your property less attractive to potential buyers and expose you to major risk of total or significant loss.
Aubrey Cook, a first-time homebuyer specialist in Colorado Springs, Colorado, who sells homes 39% faster than the average area agent, has seen the unfortunate consequences of homeowners canceling insurance.
“I did have a seller who didn’t have homeowners insurance, and her home had a bad roof. I had to tell her I couldn’t sell her home without insurance on it.
“If we were to go through the process of selling the home and it were to burn down in the middle of it, then what? You’d have nothing and would be completely out.”
3. A natural disaster strikes and you can’t afford to fix the damage
Let’s say you’ve paid off your mortgage and are enjoying owning your house free and clear. You decide to cancel homeowners insurance to cut down on your monthly expenses. Things are going well — until a wildfire destroys your home completely. You own the land, but there’s nothing left to your former home.
With the right insurance policy, your insurer would cover the damage to your home from the wildfire and some other natural disasters (such as wind or hail damage). Now you’re responsible for paying for the cost to rebuild your house, which may be higher than your home’s market value at the time of the disaster. You’ll also need to pay to replace all of your belongings.
Clark Kelman, Partner at Page Chaffin & Riggins Insurance, explains the risk of forgoing homeowners insurance:
“Typically, your home is your largest investment so why would you not look to protect it? Claims occur at unexpected times and cost individuals money, time, and heartache. The worst that can happen is you could lose everything you’ve worked so hard to obtain.”
Make sure you understand what is and isn’t covered under your policy. Flood and earthquake insurance are separate policies that may be worth the coverage, depending on where you live.
4. You lose expensive yet replaceable items to burglary
No one likes to consider the possibility of someone breaking into their home and stealing personal items. Unfortunately, burglary occurs frequently in the United States; it was the third-most-common type of crime in 2018, behind property crime and larceny.
If your home is broken into and expensive items — such as audio equipment, televisions, and computers — are stolen, your homeowners insurance will most likely cover that loss. They’ll also cover damage to your property caused by the theft (for example, a broken window or kicked-in door) through your dwelling coverage.
Now, say you’ve cancelled your insurance. You guessed it — you’ll need to cover the costs of repairs and replacing stolen items out of your own pocket.
Side note: the claims process will require proof of what was stolen (ideally with photos), its value, and present condition. Save yourself the stress of trying to recall this information during the wake of a burglary. You can keep a list of your home inventory with photos and notes in a safe place.
5. You lose priceless possessions to burglary
Let’s face it — there are some things that just can’t be replaced. From sentimental pieces of jewelry to works of art and coin collections, we all have priceless possessions in our homes.
If you’ve spent years amassing a particular collection, you probably don’t want to lose it to some nefarious character who decides to go rummaging through your home.
Your home insurance policy may or may not cover these collections under its regular property insurance. However, you can certainly purchase additional coverage to protect the value of these items if they are ever lost to theft. (Keep in mind that some policies may limit the amount of your claim or not cover your collection at all.)
Depending on your collection, you may want to consider having it formally appraised and then exploring your options with your current insurer and speciality insurance companies. No matter which route you decide to go, it’s in your best interest to make sure your collection is covered so that in the event of a physical loss, you can still recoup its value. Without insurance, you’ll lose the collection and its total value if a theft occurs.
6. Someone gets hurt on your property and sues you
Oh boy. This one may be every homeowner’s worst nightmare. Maybe you’ve paid off your mortgage and have cancelled your insurance policy. But you have a trampoline in your backyard, or maybe a swimming pool that everyone in the neighborhood loves. Or perhaps you’ve got a dog who bites from time to time.
These three scenarios are enough to get any defense lawyer’s hackles up. No matter the details, when something bad happens to someone else on your property, the injured party may decide to sue you for everything you’re worth (and then some). And that includes your house.
With homeowners insurance, you’ll have basic liability coverage, which should protect you from litigation fees and medical bills. The amount you’re covered for depends on your policy, but it typically begins at $100,000. Depending on your net worth, additional liability coverage can be a wise choice.
The same advice goes for homeowners with a pool. You’ll want to make sure your liability coverage reflects the additional risk of having a pool on your property. Kelman sums up the wisdom of purchasing extra liability coverage: “It’s always a good idea to purchase additional liability limits as no one ever complains they bought too much insurance at the time of loss.”
By now, you’ve most likely come to the conclusion that cancelling your homeowners insurance probably doesn’t belong on your to-do list after closing. But what should you do after buying a house? We break down for you step-by-step so you can ease into homeownership confidently.
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