Going without homeowners insurance may seem like a good way to save money. After all, monthly premiums must be paid for insurance coverage and those premiums average $2,305 per year. That's a lot of cash.
In reality, though, making this choice could be a financial disaster. Here's why it doesn't pay to go without a policy.
Mortgage lenders won't allow it
Any homeowner with a loan on their property absolutely cannot go without homeowners insurance. Their mortgage lender will not allow it. Lenders require dwelling coverage to pay to repair or replace the home, since the house is collateral securing the loan.
Lenders will require proof of insurance before closing on a home. And while a homeowner may try to cancel coverage after closing -- even though they shouldn't -- this usually isn't possible.
Many lenders require homeowners to include a monthly payment toward their insurance costs in each mortgage payment. This money is put into an escrow account, and the lender pays the insurer out of it when premiums are due.
Even when this isn't the case, a mortgage lender is notified when a policy is canceled. The lender could buy expensive insurance, called force-placed or lender-placed coverage, to replace the canceled policy. Or, in some cases, the failure to maintain coverage will be a violation of the loan agreement that could prompt the lender to initiate foreclosure proceedings.
It's not worth risking the forced purchase of an expensive policy or even the threat of foreclosure just to save on insurance premiums. Homeowners should not consider doing that.
It's a bad idea even without a loan
People who don't have a mortgage won't have a lender mandating they get covered. But even homeowners who have a paid-off property can't afford not to have coverage.
Without homeowners insurance, a property owner would have to pay out of their own pocket for any disaster. They might have to replace the home with no help after devastating events, like a fire. With new home construction costing as much as $100 to $200 per square foot on average (according to data amassed by Quicken Loans), this could get expensive very quickly -- especially on larger properties.
Homeowners insurance should also provide coverage for more than just the dwelling (even though that's all lenders usually require). It's a good idea to buy liability coverage to pay damages in case someone gets hurt on the property, as well as personal property protection to pay for possessions at the home.
Most people simply cannot afford to replace every item they own if it is destroyed by a disaster at the house. And if someone is hurt or killed and the property owner incurs legal fees and is required to pay thousands -- or millions -- in damages, this would be a huge financial obstacle without insurance.
Because liability and personal property coverage are so important, people not only shouldn't go without coverage but they should buy more than the minimum a lender would require. Anyone who can't afford to rebuild their house and replace everything they own without struggling financially should contact a home insurer to make sure they have comprehensive homeowners insurance coverage in place today.
FAQs
“The majority of homeowners' net worth is tied up in their homes. You can lose most of your net worth in one severe weather event if you don't have insurance,” she said. Bach co-founded the consumer advocacy group United Policyholders three decades ago to counter the wealthy and powerful insurance industry.
Do you really need home insurance? ›
Homeowners insurance will offer ongoing financial protection
Will all the money and care you've invested in your home—and life—it's advisable to guard against financial risk and always keep a homeowners policy in force.
What happens if you don't get home insurance? ›
Legally, it is acceptable to not have home insurance in California. You will not face any legal consequences, although you may be in breach of the terms of your mortgage agreement.
How many Americans do not have homeowners insurance? ›
Based on an analysis of 2021 American Housing Survey data from the US Census Bureau, this report finds that: One in thirteen homeowners across the United States are uninsured (7.4 percent), equivalent to 6.1 million homeowners.
Is it OK to cancel home insurance? ›
A policyholder can also initiate a home insurance cancellation. Perhaps you found a cheaper company or you have sold your home. You can call your agent or carrier to request that your policy be canceled on a specific date. You may need to sign a cancellation form to confirm your request.
Should you have homeowners insurance if your house is paid off? ›
must I maintain home insurance if my home is paid off? California does not require homeowners insurance. However, most mortgage lenders require it. Once you pay off your mortgage, your lender can no longer require you to have home insurance.
Why do people not get home insurance? ›
“Many consumers are struggling to afford rising premiums and must go without homeowners insurance,” said Sharon Cornelissen, the Consumer Federation of America's director of housing and co-author of the report. “That puts them at risk of losing everything.
Can you lose your mortgage without homeowners insurance? ›
If you breach your mortgage contract by not having homeowners' insurance, you might face added costs and, eventually, foreclosure. Defaulting on a mortgage loan means failing to keep the promises you made when you signed the promissory note and mortgage contract.
Who is the cheapest home insurance? ›
USAA and Auto-Owners are the cheapest home insurance companies on average, according to Bankrate's research.
What happens if you lose homeowners insurance? ›
In these instances, you could be stuck with tens of thousands of dollars in repairs—or costs to replace your home. Another consequence of lacking home insurance could be that your mortgage lender buys it for you. Mortgage lenders typically require borrowers to insure their homes.
If you don't have homeowners insurance, you may find yourself unable to repair or replace your home if something were to go wrong. In a worst case scenario, you could also lose your home.
Is it smart to drop homeowners insurance? ›
However, going without coverage is inadvisable for many reasons, not least that gaps in your coverage will negatively affect your rates or ability to find affordable coverage. The best option that most homeowners have is to shop around.
Is home insurance mandatory in the US? ›
No states have laws mandating homeowners insurance, but, if you finance your home, your lender will typically require a home insurance policy. The standard coverages for homeowners insurance are generally the same in all states.
Is it hard to get homeowners insurance after being dropped? ›
After your homeowners insurance is cancelled or nonrenewed, you can shop around and try to get a policy with a different insurer. If your policy was cancelled or nonrenewed because the company is no longer offering coverage in your area, purchasing a new policy with a different insurer shouldn't be difficult.
Why did State Farm cancel my homeowners policy? ›
State Farm said it is working with the California regulators “to establish an environment in which insurance rates are better aligned with risk.” Last year, the company said it would not issue any new policies in California, citing construction costs that were outpacing inflation and “rapidly growing catastrophe ...
How long does cancelled home insurance stay on record? ›
How long does canceled insurance stay on my record? Insurance companies report claims and cancellations to the Comprehensive Loss Underwriting Exchange (CLUE) database. The CLUE records typically last five to seven years.
Do most people have home insurance? ›
Tierra is among a growing number of American homeowners who are “going bare,” or living without homeowners insurance. A recent study from the Insurance Information Institute found 12% of Americans no longer have home insurance, up from 5% in 2019.
Is property insurance mandatory? ›
Contrary to popular belief, the law does not mandate property insurance for home loans or for loans against property in India.
What happens to my mortgage if I can't get insurance? ›
If you fail to purchase coverage or let it lapse, your company may send your mortgage into default. Alternatively, the lender could choose to buy a policy on your behalf. This is called force-placed insurance, and it is generally more expensive and provides less coverage than a policy you would purchase on your own.
