Is Going Without Home Insurance Worth the Risk?

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.