Can I Self-Insure My Home?

Self-insuring your home means foregoing traditional home insurance and instead using your own money to cover any losses or damages. While self-insuring may seem like a way to save on insurance premiums, it carries significant financial risks that make it impractical for most homeowners.

What is Self-Insuring a Home?

Self-insuring your home means you have set aside enough of your own money to cover the costs that would normally be paid by a home insurance policy. Rather than paying premiums to an insurance company, you take full financial responsibility for repairing or rebuilding your home if disaster strikes.

With self-insurance, you essentially act as your own insurance company. You absorb the risk and pay claims out of your own pocket rather than relying on an insurer.

Common examples of self-insuring a home include:

• Using savings to rebuild after a fire rather than filing an insurance claim.

• Paying contractors yourself for tornado damage instead of involving your insurer.

• Covering theft losses from your emergency fund rather than reporting it to your insurance.

Self-insuring may seem appealing as a way to avoid paying home insurance premiums. But most experts warn against self-insuring your residence due to the huge financial risks involved.

Requirements for Self-Insuring Successfully

Very few homeowners are truly in a position to successfully self-insure their property. To self-insure your home without taking on excessive risk, you must:

1. Own your home outright – No mortgage lender will allow you to forego home insurance and self-insure. You need full ownership and control of your home.

2. Have very significant assets – You need substantial savings and liquid assets to cover rebuilding costs, liability claims, and loss of use expenses in a worst-case disaster scenario.

3. Be debt-free – Having no mortgage, loans, or other debt obligations allows you to direct more cash towards self-insuring your property if needed.

4. Understand all risks – You must fully understand perils like fire, theft, flooding, and liability that home insurance would cover so you know your maximum financial exposure.

5. Be disciplined about saving – Diligently setting aside money and resisting spending is key to build reserves for successfully self-insuring your home over the long term.

Very few homeowners meet all these conditions. As a result, self-insuring a home is only a viable option for a small percentage of the population.

The Pros of Self-Insuring Your Home

You avoid paying home insurance premiums – This is the main advantage of self-insuring. You get to keep the money you would have spent on insurance each year.

You control payouts – Rather than dealing with an insurance adjuster, you directly manage repairs and claim payments.

No claim refusals – Insurance companies may sometimes deny claims due to exclusions or technicalities. With self-insurance, you won’t have claims declined on a technicality.

No insurance limits – Insured losses are capped by policy limits. With self-insurance, you can spend whatever is needed to fully repair or rebuild your home.

For a small minority of ultra-wealthy homeowners, these benefits may make self-insuring an option worth considering. But for most, the advantages are outweighed by the substantial risks.

The Cons of Self-Insuring Your Home

You bear 100% of costs – One major claim can wipe out all your savings set aside for self-insuring your property.

Rebuilding costs could exceed savings – Many homeowners underestimate the full cost to reconstruct their home from the ground up.

Preparedness takes discipline – Diligently saving takes years. Failing to stick to a savings plan will leave you underprepared to take on risks yourself.

Limited coverage – Home insurance includes much more than just dwelling coverage. Self-insuring often leaves gaps like liability, loss of use, and more.

Mortgage restrictions – Lenders require you to maintain home insurance. Self-insuring is usually only an option if you own your home free and clear.

Inadequate reserves – Most homeowners lack the substantial liquid reserves needed to fully protect their property on their own.

These cons apply to the vast majority of homeowners. Very few are financially equipped to successfully take on property risks without insurance.

Examples of Costs to Self-Insure For

To understand why self-insuring poses such a financial risk, it helps to consider specific costs a homeowner would need to cover themselves:

• Dwelling rebuilding – At $100 to $300 per sq. ft., rebuilding costs for a 2,000 sq. ft. home may reach $200,000 to $600,000.
• Hotel stays – If the home is uninhabitable after a fire or flood, nightly hotel costs can pile up fast for the family.
• Mortgage payments – The homeowner must still make monthly mortgage payments even if the home needs to be rebuilt.
• Liability claims – A major liability lawsuit from an injury on the property can potentially cost millions.
• Belongings – Replacing all damaged possessions from a total loss could cost tens of thousands of dollars or more.
• Construction overruns – Unexpected delays and materials shortages could drive rebuilding costs 20% higher than projected.

Very few homeowners have the assets and savings to comfortably handle all these expenses at once without insurance. This is what makes self-insuring such a precarious proposition.

Is Self-Insuring Ever a Good Idea?

In extremely rare cases, self-insuring a paid-off home may make financial sense:

• For a run-down house with low rebuilding cost
• If the land value far exceeds the home’s value
• For a secondary vacation property you could afford to lose
• If you have many millions in liquid assets to spare

But for nearly all primary homeowners with mortgages and typical net worths, attempting to self-insure poses too great a risk.

The bottom line is if you have to ask “can I self-insure my home?”, the answer is almost certainly no. Home insurance provides invaluable financial protection that only the wealthiest few homeowners can feasibly go without.

Can I Only Partially Self-Insure?

Some homeowners think they can self-insure by just having a high deductible home insurance policy. But this is not true self-insurance, and still leaves you dependent on the insurance company.

With true self-insurance, you rely entirely on your own money and have no insurance coverage at all. Maintaining a high-deductible policy still makes you reliant on the insurance company to cover losses beyond your deductible amount.

For instance, if you have a $50,000 deductible and a total loss costs $400,000 to rebuild, you may think you are self-insuring the first $50,000. But you still need the insurance company to pay the remaining $350,000 you would be unable to cover. This is not self-insurance in the true sense.

Options for Limiting Home Insurance Costs

If you are looking to reduce your home insurance premiums, here are some alternate ways beyond self-insuring:

• Increase deductibles – Going from $500 to $1000 or $2500 deductible can lower premiums up to 25%.
• Drop coverage – Removing add-ons like sewer/drain backup can reduce premiums.
• Bundle policies – Place home and auto insurance together with one company for a multi-policy discount.
• Improve home security – Update locks, add alarms and cameras to qualify for safety discounts of up to 30%.
• Raise credit score – Insurers use credit-based scores to set rates. Improve your credit to earn lower premiums.
• Shop around – Compare quotes from multiple insurers to find the best rate.
• Seek discounts – Take advantage of any home insurance discounts you may qualify for.
• Buy annually – Paying premiums annually rather than monthly can reduce costs.

Using strategies like these allow you to maximize savings on your home insurance premiums while still maintaining critical financial protection against catastrophic losses.

Is Self-Insuring a Home Worth the Risk?

For nearly all homeowners, self-insuring is simply too financially risky to consider seriously. A total loss event could drain your entire life savings virtually overnight.

Plus, the savings on insurance premiums are usually quite small relative to the immense financial exposure self-insuring creates. Those savings get quickly erased the moment a single substantial claim comes up.

Maintaining home insurance allows you to transfer risk to an insurer at an affordable price. Attempting to self-insure puts your family’s financial security in grave jeopardy.

Unless you are exceptionally wealthy, own a low-value home free and clear, or are fine losing your property, opting to self-insure will almost certainly lead to financial disaster. For nearly all homeowners, having proper insurance in place provides invaluable risk protection.