January 31, 2017
by Sean Hess, Owner, Broker, Author
Following is an excerpt from my forthcoming book, “How To Buy A House: Resales and Foreclosures”.
Insurance a “Bad Bet” or a “Good Bet”?
Statisticians and economists sometimes voice the opinion that homeowners insurance is a bad bet because the risk is not high enough to warrant the cost, that in fact it’s a “bad bet” based on the probability of loss. While I agree the risk is low on the typical house, I’m not really insuring the house when I purchase homeowners.
I am insuring my retirement.
Here are my thoughts: Yes it is money down the hole paying $700-ish a year for homeowners insurance in the unlikely event that my toaster oven and my home’s electrical system have a disagreement.
However, if the toaster oven and the wiring decide to skip mediation and it results in a fire, well, my insurance buy is a “bet” on the absolute certainty that I don’t have the money (or time) to rebuild the house if it burns down. Or more correctly, I may be able to rebuild, but with an absolute certainty I would bankrupt my retirement savings. SO here’s my actual bet on insurance:
1) Buy insurance at $700 a year: 100% certainty house is rebuilt, and someone else takes care of it
2) Do not buy insurance: 100% certainty house will not be rebuilt or all savings wiped out, and I will have to take care of it.
Thus the certainty I choose is $700 and a bargain at that. I’m not insuring my house; I’m insuring (as best I can), my retirement and my time (along with my sanity).
The one caveat I’ll make is in the case of vacation homes.
If this were a modest vacation home with really high insurance costs (say, $5,000 or more a year in flood insurance for a smaller, older home on the ocean), I might choose to invest that money instead of purchase insurance. This would be a gamble in the short term, for as long as it takes to build the invested funds into a realistic hedge against damage to the home. The nice thing about this approach is that these funds will add to my bottom line, especially after I sell the home and the funds are “freed.” This would also assume, of course, that the home and the ocean don’t decide to coexist in the same space for a period of time (and thus the funds would be needed to rebuild).