Homeowners insurance: Don't go bare

Homeowners all across the United States are doing double takes as they look at their annual insurance policy renewal statements.

A spate of natural disasters, accompanying insurance claims and subsequent premium increases has pushed some homeowners to the breaking point. Out of both personal and financial frustration, some are considering dropping their coverage.

In the insurance industry, it's known as "going bare." And while it might be tempting if you're looking at a policy price that's tripled or quadrupled in the last year, it's not a decision to be made rashly.

"Two types of people might qualify to go without coverage," says George Yates of Dayton Ritz & Osborne, an insurance agency based in East Hampton, N.Y. "The independently wealthy, with an asset so small to them that it wouldn't matter if they lost it, or someone who just can't afford insurance.

"In either case, it's not particularly good risk management."

But sometimes, a homeowner's day-to-day financial management issues are more pressing.

In Florida, for example, homeowners are finding their premiums have skyrocketed. Add to that deductibles that look like they won't be met unless the structure is destroyed. Plus, many insurers have either gone out of business or decided to stop writing policies, limiting customers' comparison-shopping options.

In the end, many homeowners find themselves in the unhappy position of choosing between high premiums or exorbitant premiums. Or no premiums.

Premium payments
While the thought of no longer making expensive premium payments might be appealing, don't drop your policy until you ask yourself some hard questions and come up with realistic and acceptable answers.
Hard questions to ask yourself
  1. Can I drop my homeowners policy?
  2. Can I afford to regularly put money into an account to cover any storm damages?
  3. How large should my self-insurance account be?
  4. Can I afford to buy a basic hazard policy?
  5. What happens to my liability coverage if I cancel my homeowners policy?

1. Can I drop my homeowners policy? If you have a mortgage, the answer is probably "no." Because you have a lien on the property, most home loans require you to have coverage that the lender finds suitable. If the policy lapses, you can be in mortgage default. If you are having trouble finding an insurer or paying the premiums, call your lender to see if it can offer suggestions and/or work with you to solve the problem.

2. Can I afford to regularly put money into an account to cover any storm damages? This is a necessity if you're going to drop your homeowners insurance coverage. Without the emergency self-insurance account, you'll either be stuck not making repairs, borrowing money to make them or putting them on credit cards, which could create additional problems.


3. How large should my self-insurance account be? Sit down and do a worst-case scenario in the event of a natural disaster. Consider what it will cost to repair or replace your home or major parts of it, such as your roof or walls that are more exposed to potential damage.

Then there are your belongings: furniture, clothing, food, exterior buildings, landscaping, and potential costs of debris removal or demolishing partially standing structures that need to come down for safety reasons.

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