Question

Uneek just paid off her house and is thinking about no longer having homeowners insurance (her banked required it as part of her mortgage agreement). Her house is worth $300,000. What are the pros and cons of this decision? Would your answer to the previous question change if you found out that Uneek has $3,000,000 in the bank?

Answer 1

Homeowners insurance is an agreement between the insurer and the insured wherein the insurer promises to compensate a certain sum on risks materializing related to owning a house. Risks usually covered by insurance include damage due to natural factors, theft or burglary, repairs etc.

Pros of having a homeowners insurance:

1. The individual does not save to specifically decide to save for future unknown risks since the premium is fixed by the insurance company.

2. It gives the owner peace of mind about any future home related liabilities.

Cons of having a home owners insurance policy:

1. The insurance policy does not cover all perils and additional insurances may have to be taken for excluded perils which increases the financial burden.

2. The premium on home insurance is usually high and only a wealthy individual may be able to sustain it in the long run.

If Uneek already has $3 million in her bank account which will mitiagte the effects of a risk materializing in case she decides not to have a home owners insurance policy. Most policies provide coverage up to $2 million and she has many which exceeds the normal limit. Rather than keeping the money idle in her checkinga account, she can invest in securities to meet inflation premium risk.