They Say, Hearsay
I resent paying an insurance premium, so my defense is to pay off the house. Then, I will pay myself the $2,000 a year that I now fork over to the insurance company. Odds are that in the next 25 years, I will come out ahead.
We Say
Being able to pay off a mortgage is for the prosperous, smart, and lucky. Deciding to self-insure kind of eliminates the smart people from the mix, though the prosperous and lucky might remain—for a while at least. There are those who will take a gamble on 25 years without a major hurricane in Florida. Hey, only 20 more years to go, since we've been storm-free for five years in a row already. What are the odds that a storm will strike this year or next?
Actually, the odds are that a Category 3 storm or greater will strike Florida every four years, on average. Another fact for everyone—the gamblers and the more rational among us—to consider: The entire sum of money paid for property insurance over the life of a typical 30-year mortgage is a surprisingly small fraction of a home's replacement value and the value of its contents, usually between 10 and 14 percent. That does not even factor in the benefit for additional living expenses if the homeowner is displaced because of damage.
Most policyholders know how much coverage they have on their home (and some of them are pretty ticked off that the insured value is higher than the real estate value). However, many are completely unaware of the value of the contents' portion included in the policy. They know their home is insured for $150,000, but they overlook the additional 50 to 70 percent for contents coverage.
They don't think about this because of the way it is laid out on the declaration page. If they happen to actually read the declaration page, the coverage for structure and contents is often not tallied. While there may be reasons for that, contrast how that looks to the reader with how the premium amount is displayed—usually on the declaration page more than once, and in big, boldface type.
Naturally, the amount people write on their premium checks tends to stick in their brains. Agents can balance that memory by helping clients understand more fully the total value of the insurance package, not just the bill.
Policyholders could benefit by knowing that they may be paying less than half of one percent of the value of their total property insurance package in premiums annually. Some may pay more, others less. Yet, we seldom talk of the coverage package, only the price. This disconnect is fueling insurance industry critics and those who do not understand the risk transfer that comes with buying insurance. Self-insure and there is no risk transfer, obviously—the risk is all yours. There is a big difference between playing the odds and probability. In gambling, when the odds are on display, that is not the true chance of winning, and what is paid out depends on the total amount that has been bet. In insurance, what is paid out depends on the size of the loss, and what is on the policy is exactly what would be paid off if the worst happened. People buy insurance because if they lost their home due to any peril, the financial damage would be greater than the dollar amount.
Self-insurance is a major gamble, and as people weigh the odds they will sometimes take risky bets to save money today and hope tomorrow doesn't make them losers. Those thinking of placing a bet by "going bare" and foregoing insurance coverage may want to first look online at the Landfalling Hurricane Probability Project. Type that name into your browser, and you will navigate to an interactive display that lets you select your state and county to see the chances of a hurricane hitting close to home. It just might serve to refresh one's recollection of Florida's risk.
According to the American Housing Survey by the U.S. Census Bureau, 32 percent of homeowners do not have a mortgage. They were able to make a wise financial decision to pay off a mortgage. However, an unfortunate roll of the dice that brings a fire, flood, or hurricane to their doors is a high-stakes game where the odds are against them.
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