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Going Without Homeowners Insurance: Is It Worth the Risk?

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In a Nutshell

If you own a home, it’s probably the largest asset you have, which is why it’s a good idea to insure it. Homeowners insurance protects your home and the belongings inside it from loss or destruction. It can also provide financial protection if someone is injured on your property. If you have a mortgage, most lenders will require you to carry at least a certain amount of insurance on your home. While homeowners insurance can be costly, not having it puts you at great financial risk. This article will explain why.

Written by Mark P. Cussen, CFP® , CMFC.  
Updated September 27, 2021


If you own a home, it’s probably the largest asset you have, which is why it’s a good idea to insure it. Homeowners insurance protects your home and the belongings inside it from loss or destruction. It can also provide financial protection if someone is injured on your property. If you have a mortgage, most lenders will require you to carry at least a certain amount of insurance on your home. While homeowners insurance can be costly, not having it puts you at great financial risk. This article will explain why.

There are no laws that require homeowners to carry insurance on their property. This may strike you as odd since other kinds of insurance, including car insurance, are legally required. But unlike car insurance, homeowners insurance coverage isn’t required because homes obviously can’t damage each other like cars can. That said, most homeowners’ policies do provide liability coverage to protect you if someone gets injured on your property. This is similar to the liability coverage that comes with auto insurance. 

And while there aren’t laws governing homeowners insurance, most mortgage lenders will require you to carry at least enough insurance to cover the mortgage balance if something happens to your home. This protects their investment in your home. If your home is paid off and then you take out a home equity line of credit, then the lender will usually require you to take out a policy with a coverage limit that is at least as large as the line of credit they’ve issued. Regardless of whether you’re required to have this coverage or not, since a home is most people’s largest and most valuable asset, it’s wise to insure it. 

A Home Insurance Policy Provides Several Types of Coverage

The average homeowners insurance policy provides several different types of coverage for different types of losses. Keep in mind that your homeowners insurance only covers one property. If you own more than one property you’ll need to get a separate policy for each one. Also if you rent out your property, it’s important to know that renters insurance doesn’t cover the rental property itself, only the renter’s belongings. 

Your homeowners insurance covers your actual dwelling place, which provides protection for the home itself and anything built into it like the floors, walls, roof, HVAC system, electrical, plumbing, appliances, and so on. It may also cover other, detached structures like fences, sheds, garages, patios, decks, and separate living quarters. 

Additionally, it covers your personal property or your personal belongings inside your home if they are damaged or stolen. Though you may need to get additional specific riders to cover some types of valuables, such as jewelry or coin collections. 

If you experience loss of use of your home due to a natural disaster or other covered event, your insurance will pay for your temporary living expenses while your home is uninhabitable and being repaired. 

Homeowners insurance also includes liability protection. If someone is injured or their belongings are damaged while on your property, you could be held responsible. Liability will pay for any related expenses, including legal fees if you’re sued. It also covers medical payments if someone is injured on your property.

If you live in a high-risk area like a flood zone or earthquake, you can get additional high-risk coverage. In fact, your mortgage lender will probably require it. Some homeowners have to purchase flood insurance separately.

How much coverage do you need?

As with any type of insurance, you can choose how much coverage you want from your homeowners insurance plan. Many homeowners choose to insure only a portion of the value of their property to get cheaper coverage. But this is risky. The value of most homes increases over time. This means that the homeowners’ policy will cover a shrinking percentage of the home value as time passes. 

For example, say you buy a house for $300,000 and get a homeowners insurance policy for $250,000. Unless you change your policy, your $250,000 coverage will stay constant while the value of your home increases over time. If your house was destroyed by fire after 10 years and its worth had increased to $375,000, your policy will come up $125,000 short when it comes time to rebuild or find another home.

Without Homeowners Insurance, You Run The Risk of Serious Financial Loss

Most financial experts will say that you absolutely need to carry homeowners insurance, regardless of whether your home is fully paid for or not. Without this coverage, you take on a lot of risk and can end up financially responsible for big expenses, like:

  • If your home is gutted by fire or any other type of natural disaster, you could lose everything if your home is not insured. You would have to pay for the cost to rebuild out of your own pocket, which is impossible for most people. 

  • If your home is burglarized and your valuable possessions such as cash, jewelry, electronics, collectibles, or antiques are stolen, you wouldn’t be compensated for their loss.

  • If someone gets hurt on your property (regardless of whether they are a guest or a trespasser) and they try to sue you, then your homeowners insurance policy will provide you with at least a measure of coverage. You can use this coverage to pay for legal fees or damages awarded in court. 

Without homeowner’s insurance, you also face other risks with your lender and when it comes time to sell your home. If you have a mortgage on your home and cancel your coverage or let it lapse, then the insurance company will most likely notify your lender that you’re no longer covered. Your mortgage company may then decide to send your loan into default, which would hurt your credit score and could ultimately result in foreclosure

Also, most real estate agents will not help you sell your home if you do not have homeowners insurance. They do not want to take the chance that something could happen to your home after the deal has closed but before the new buyers have a chance to get coverage. Of course, you can sell your house on your own without a realtor, but if you are not experienced in dealing with real estate transactions, this can be very difficult and somewhat risky. 

Let’s Summarize...

Though it’s not legally required, it is a good idea to carry homeowners insurance on your property regardless of whether you have a mortgage on it or not. Most mortgage agreements will require you to get a policy with coverage that is at least equal to the loan amount. Homeowners insurance protects you in many ways. It provides liability coverage in case someone gets injured on your property and gives you financial protection from damage or theft.

Your home is typically your largest and most valuable asset. It makes sense to protect your investment in it. If the policy seems expensive, remember that the protection it provides will help you avoid large, unexpected situations you wouldn’t otherwise be able to handle financially.



Written By:

Mark P. Cussen, CFP® , CMFC

LinkedIn

Mark has over 25 years of experience in the financial industry, and has worked with investments, insurance and mortgages as well as income tax preparation and comprehensive financial planning. His writing work includes insurance and securities training manuals and educational art... read more about Mark P. Cussen, CFP® , CMFC

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