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Fed up with paying up for home insurance? What about self-insuring?


If you’re trying to control your blood pressure, brace for a spike when you pay your next homeowners insurance bill. The cost is soaring while the coverage is shrinking.

Home insurers operate a cyclical business. There are multiyear periods when they compete hungrily for your business, dropping prices and expanding their offerings. But the cycle we’re in now features the opposite: rapidly rising rates as insurers fret about new perils (like the link between climate change and severe weather events such as storms and wildfires).

Carriers have sustained heavy losses in recent years, so some of them are pulling out of high-risk states such as Florida. The remaining insurers, including state-mandated assigned risk plans, limit their coverage.

Let’s say you’re financially secure. You have $1 million or more in savings that you could easily tap in an emergency. And you’re fed up with price hikes for policies that offer less and less protection.

Should you ditch your homeowners policy–and self-insure?

To answer this question, think worst case. Imagine a total loss of your home.

Maybe you could afford a new roof or a partial renovation. But to clear debris and rebuild from the ground up (especially if you must pay even more to bring your home up to code), the price tag may stun you.

“You can have a healthy balance sheet but that’s not the same as having the money to rebuild your home,” said Katherine Frattarola, an executive vice president at HUB International, a Chicago-based insurance brokerage firm. “You may have $3 million or $5 million in the bank. But if you need 20% of that to rebuild, and pay surge pricing [after a natural disaster], that’s a huge chunk of your assets.”

Some disciplined savers designate a set amount every year to cover uninsured losses. But Frattarola warns that even if you build a buffer to cushion against a total loss, “you still have to ring-fence those assets” while continuing to fund your overall emergency reserve and withstand other unexpected hits to your income.

If you’re wondering whether you can afford to self-insure, consider the plight of insurance companies as they struggle with the potential cost of future claims. Average annual losses could reach $133 billion, according to risk-assessment firm Verisk Analytics. In North America, about 51% of the economic loss from natural disasters is covered by insurers. So from individual homeowners to global insurance giants, the effort to manage ever-expanding risks grows by the year.

“Having to cover protracted litigation can drain your savings.”

Even if you can set aside boatloads of cash to draw upon after a total loss, consider the other coverages that standard homeowners policies offer. Separate from property loss, home policies include personal liability protection.

This liability coverage might have a per-occurrence limit of $300,000 or $500,000 (if it’s $100,000, that’s probably too low). This kicks in if you’re responsible for damages or injuries to others.

Coverage extends to relatives who live at home, such as your children, who might cause property damage or bodily injury. If you’re sued over an accident, liability coverage helps pay for your lawyer and any settlements against you.

Self-insuring against a total loss of your home is one thing. But having to cover protracted litigation can drain your savings.

High-net-worth individuals often buy umbrella insurance for added liability protection. This can raise your limits of liability to $1 million or more. But you must own an underlying homeowners policy in order to purchase umbrella coverage.

“Umbrella insurance is important, especially if your lifestyle is complex,” said Frattarola, who runs a HUB business unit that provides insurance solutions for high-net-worth clients. “Examples include if you have lots of underage drivers at home — or lots of boats, fast cars or animals.”

Even seemingly minor coverages folded into a typical home insurance policy can add up to real value in the event of a total loss. From water backup and sump discharge to fungi and other microbes to reimbursement for clean-up costs and code upgrades, the benefits of an insurance policy can outweigh your dismay at forking over more money every year to renew your policy.

More: Sticker shock for older adults: Essential items have gone up in price by about 10%

Also read: Housing is now overvalued in 88% of the U.S., says ratings agency Fitch

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