Home Insurance & the Paid Off Home

Over the past few weeks, I’ve had the pleasure of working with two retired people in the Dallas / Fort Worth area.  What they have in common is quite admirable, they own their homes outright.  One paid off the mortgage while the other person paid cash for their current home.  That, however, is where the similarities end.  The person that paid off their mortgage dropped their home insurance when the mortgage was paid in full, while the person that paid cash for their home continues to maintain a home insurance policy.

These two people and their stories raise an interesting question; should someone who either has no mortgage or who paid cash for their home keep a home insurance policy in force?  It’s an interesting question that could be debated toward a yes or no answer, however, I think it better serves our purposes to examine the pros and cons of such a decision.

The biggest advantage of dropping home insurance once a mortgage is paid off is the savings the homeowner would incur from not paying for home insurance.  Home insurance rates are difficult to predict based on all the factors that determine the premium (reconstruction cost, discounts, coverage, etc.), but let’s assume they’ve saved $10,000 over the past 10 years.  If the home owner were to place that money in a savings account or some form of investment, then they may be in the position to handle replacing a roof due to a hail storm or some other minor to moderate event such as a water leak, etc.

As long as there were no events and there were able to consistently save the amount they’d pay for home insurance, they’d be ahead.  The issue is most people aren’t able or willing to consistently save this money to be used when a hail storm necessitates a new roof.  In most cases, this money would go toward the monthly budget leaving the person with little or no funds to replace a roof, repair damage from a water leak, or some other minor to moderate event.

Even if they did manage to faithfully save that money, they could still be in a financial hole if there was a major event such as a home fire or damage from a tornado.  The home would not have to experience a total loss either.  Major damage to the home from a fire or tornado could quickly wipe out any savings the person had accumulated over the course of 10 or more years.

The other scenario that could be just as financially devastating is a liability claim.  Most home insurance policies provide some level of liability coverage to protect the homeowner in the event they are sued for negligence when someone comes on the property, invited or not, and is hurt.  If the homeowner did not have a home insurance policy, they would have to pay for all legal fees out of their own funds which could be quickly exhausted.

I would recommend anyone who has been fortunate enough to accomplish the financial reward of paying off a mortgage to continue to maintain a home insurance policy.  The cost of a policy is much less, even if there’s no claim for 10 or 20 years than if there’s a major loss or liability claim.  What do you think?  Share your thoughts, experiences, and questions with me in the comments section of our blog or on our Facebook and Google+ pages.  I’d love to hear from you!

Evie Wise
Evie Wise


Evie Wise
Evie Wise

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