Although when you pay off your home mortgage and are no longer obligated to a lender who requires you to carry homeowner's insurance, your home remains a significant financial asset you may not want to go unprotected. Just because you paid off your mortgage doesn't mean an unexpected catastrophe can't strike.
By canceling your homeowner's policy, you are taking on a huge financial risk. But if you aren't certain what to do, there are several factors to consider when deciding whether to drop your homeowner's policy or continue it.
If your home is damaged or destroyed by fire or certain natural disasters, you can suffer a major financial loss. Without insurance, you would be financially responsible for repairing or rebuilding the structure. Depending on the extent of the damages, you could be looking at thousands, tens of thousands, or even hundreds of thousands of dollars. If you have homeowner's insurance, you can file a claim as long as the loss is the result of a peril covered by your policy. Homeowner's insurance also covers losses due to theft and vandalism.
Personal Property Coverage
A standard homeowner's policy pays to replace personal property that is stolen or destroyed by fire or another disaster for which you are insured. Generally, insurance companies provide coverage for a certain percentage of the amount for which you insure your dwelling. For example, if your insurer provides personal property coverage for 60 percent of the $200,000 for which you have your home insured, your personal belongings are insured for $120,000. But without insurance, unless you've saved a hefty emergency fund to cover the costs, you may need to borrow money to buy what you need to start over and still not be able to replace all that you've lost.
The liability coverage included in your homeowner's insurance policy provides protection if someone is injured on your property. Since a lawsuit can lead to the loss of any other assets you have in addition to your home, not having insurance is a huge risk to take. Besides the award the court may make if someone sues you, there are the legal costs to consider. Regardless of if you drop the coverage on your home's structure, ask your insurer if you can buy a personal liability policy separately in the event you face a lawsuit because of property damage or bodily injury you cause to another.
Risk to Insurers
If you drop your homeowner's insurance and then try to get it back later, insurers may see you as a higher risk. Some take canceling your policy as a sign you couldn't afford to make the premium payments. Even if you get insured later on, there's a good chance the coverage will come at a higher cost. Contact an insurance company like Northeast Underwriters for more information.