By Chris Taylor
NEW YORK (Reuters) – Owning a home can seem like a risky business, from paying the mortgage every month to worrying about disasters like fires, floods or tornadoes.
But here’s something even riskier: going completely uninsured on your US home.
It’s called “naked,” and 12 percent of American homeowners report doing just that, according to a survey by the Insurance Information Institute (III) and Munich Re. This is an increase of only 5% in 2015.
In some areas, it’s believed to be even higher than that — between 15-20 percent of Florida homeowners, the highest rate in the nation, according to III.
This means that if disaster strikes, you’re “self-insured”—a fancy way of saying you’ll need to find the means to recover. Unless you happen to have hundreds of thousands of dollars just sitting around, it’s not going to be nice.
“Thinking you can recover from a major disaster like a hurricane, tornado or wildfire without property insurance is unrealistic for 99 percent of U.S. homeowners,” said Mark Friedlander, director of communications for III.
Stripping is still quite uncommon: This is because if you take out a mortgage on the property, lenders usually require proof of home insurance.
Still, some homeowners choose to take that risk. One reason for that is skyrocketing costs: Average home insurance premiums are now $1,759 a year for a $250,000 home in coverage, according to financial information site Bankrate.com. This is as much as 23% more than a year ago.
Second, it can be difficult to find coverage because some insurers are not writing new policies or are pulling out of high-risk areas altogether. After all, they face their own rising costs, from severe weather to increasingly expensive building materials.
As a result, some homeowners make the biggest bet and end up with no coverage — enough to make their financial planners pull their hair out.
“I live in Florida and there is no good solution here,” laments Dennis Hunt, a planner in Melbourne, Florida. “I have several different client families who have chosen to drop their home insurance coverage due to skyrocketing premiums. I obviously advised against it.
To avoid such a big risk, here are some guidelines.
SHOP AND LOOK FOR DISCOUNTS
Before you give up, do the legwork and see what rates you can get. That means careful comparison shopping—according to a Bankrate study, Erie, Auto-Owners and USAA insurers offer some of the lowest rates available.
It also means loading up on any potential discounts you may not even realize you qualify for.
These include bundling with another policy such as car insurance (generates an average 10%-25% discount on both policies), claim waivers, loyalty discounts (as a long-time customer of your insurer), installing a security system, adding smart home devices or being a retiree or senior citizen, Friedlander says.
CONSIDER PERSONAL CIRCUMSTANCES
There’s no one-size-fits-all solution here – and some planners say that in limited, rare cases, self-insurance can be a legitimate option.
“What if the land is worth more than the house?” asks Kevin Dunleavy, a financial planner in Orlando. “What if it’s a rental that’s really a demolition? What if the client has enough investable assets to consider self-insuring? I think there are cases where giving up home coverage for much cheaper liability-only coverage makes sense.”
CHANGE THE POLICY
If penalty premiums scare you, there are ways to cut costs. One common method is to increase the deductible. This means you’ll have to cover more modest claims out of pocket, but at least you’ll be covered in the event of a catastrophic loss.
You could also “change your policy type from HO-3 to HO-2,” suggests Bankrate insurance analyst Shannon Martin. The HO-2 policy is more basic coverage where specific perils must be specified.
“Both of these changes can offer significant savings,” says Martin.
If you do decide to “bare,” just be aware that the bill may eventually come, and it can be very high indeed.
Just ask financial planner Paul Monax of Littleton, Colo., whose town was ravaged by large hail last summer, damaging roofs up and down his street.
“I have a neighbor who decided to self-insure,” recalls Monax. “They’re replacing their roof out of pocket — for about a decade’s worth of premiums.”
(Editing by Lauren Young and Aurora Ellis)