Are you playing the Fool? – Gambling on your Home Insurance

Do you resent paying an insurance premium?  Is it your plan to pay off your house then pay yourself the $3,000 a year that you now fork over to the insurance company?

Odds are a Category 3 storm or greater will strike Florida every four years, on average. Another fact for everyone—the gamblers and the more rational among us—to consider: The entire sum of money paid for property insurance over the life of a typical 30-year mortgage is a surprisingly small fraction of a home’s replacement value and the value of its contents, usually between 10 and 14 percent. That does not even factor in the benefit for additional living expenses if the homeowner is displaced because of damage.

There are those who will take a gamble on 25 years without a major hurricane in Florida. Hey, only 20 more years to go, since we’ve been storm-free for five years in a row already. What are the odds that a storm will strike this year or next?

Playing The Odds – over the life of a 30 year mortgage 2011

Most policyholders are pretty ticked off that the insured value is higher than the real estate value. However, many are completely unaware of the value of the contents’ portion included in the policy. They know their home is insured for $150,000, but they overlook the additional 50 to 70 percent for contents coverage.

Policyholders could benefit by knowing that they may be paying less than half of one percent of the value of their total property insurance package in premiums annually. Some may pay more, others less. Yet, we seldom talk of the coverage package, only the price.

Self-insure and there is no risk transfer, obviously—the risk is all yours.

There is a big difference between playing the odds and probability. In gambling, when the odds are on display, that is not the true chance of winning, and what is paid out depends on the total amount that has been bet. In insurance, what is paid out depends on the size of the loss, and what is on the policy is exactly what would be paid off if the worst happened. People buy insurance because if they lost their home due to any peril, the financial damage would be greater than the dollar amount.

Self-insurance is a major gamble, and as people weigh the odds they will sometimes take risky bets to save money today and hope tomorrow doesn’t make them losers.   The U.S. Census Bureau, shows 32 percent of homeowners do not have a mortgage. They were able to make a wise financial decision to pay off a mortgage. However, an unfortunate roll of the dice that brings a fire, flood, or hurricane to their doors is a high-stakes game where the odds are against them.

One Response to Are you playing the Fool? – Gambling on your Home Insurance

  1. Kevin says:

    I know a lot of people who struggle with this. The mortgage is paid off so no one is forcing you to carry insurance and with the cost of insurance in Florida it does get frustrating but those people who have not carried wind/hurricane insurance for the past few years are now reconsidering that option with all the storms so far this year.

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