Buying a home is one of the best long-term investments you can make during your lifetime. You build your credit rating and history with it. You build equity and wealth over time.
Although no investment comes without risk, home ownership carries less than playing the stock market. The real estate market does have its highs and lows. But after paying off the mortgage on your home, it will probably be worth more than you paid for it.
Investments need protection. If you’re buying shares of stock, you can use stop-loss orders to avoid drastic downturns. If you’re buying a home, you protect it with homeowners insurance.
While you repay a mortgage, your lender will require you to carry adequate homeowners insurance at all times. That’s because until the loan is paid in full, your home is your lender’s investment as well. But even after you pay off what you owe, maintaining homeowners insurance is simply a smart move. Here are three reasons why it is.
1. Climate Change Is Real
Weather events and natural disasters used to be “what ifs” that your homeowners insurance could cover if necessary. Now, climate change has transformed the “what ifs” into the “when it happens.” Insurance is how you can hedge your bets and protect what you own.
Insurance companies base their covered perils and associated policy premiums on risk. And as the world is witnessing the weather-related effects of climate change, insuring homes has become riskier. Make sure you’re covered for whatever is likely to hit you.
If you live in an area prone to hurricanes, for example, you will want to make sure you have appropriate coverage. Most plans cover wind and storm damage. But in certain states, hurricane insurance included in a homeowner’s policy comes with an additional deductible. It’s one you should be willing to pay.
Flood insurance is rarely if ever included in a policy. Homeowners have to purchase additional flood-specific coverage. Again, that’s because the insurer’s risk of paying claims rises exponentially for homes located in areas prone to flooding.
No matter where your home is located, it is undoubtedly vulnerable to some kind of weather-related damage. This isn’t just risk management. It’s science. Your homeowner’s insurance is the only thing that can help you rebuild after the storm.
2. Victims Will Sue
When you think about homeowners insurance, it’s probably coverage of damage to your home that comes to mind. But homeowners insurance provides protection against third-party liability claims as well. It’s common for victims to sue the parties responsible for their injuries.
If you slip on a spill at a store and are injured, you can probably sue the store for damages. The same is true if an accident occurs on private property. Someone injured while on your property can file a claim for damages against the liability coverage in your homeowners insurance policy.
A lot of people don’t have health insurance and the cost of healthcare is astronomical. Even if injury victims are your friends, it’s likely they’ll file a claim. Damages include the cost of medical care and lost wages if they can’t work due to their injuries.
If you don’t have premises liability coverage in your homeowner’s policy, you’re personally on the hook. An average bodily injury claim could be nearly $32,000 or more. If sued, you’ll also face court costs and attorney’s fees — yours and the victim’s — if a judgment is rendered against you.
It’s wise to have substantial medical payment and bodily injury coverage included in your policy. If the claim is valid, your insurer will have to pay up to the policy limits, not you. Plus, if there’s a lawsuit filed, your insurance company will pay to defend it.
3. Replacement Costs Keep Going Up
If you’ve been to the grocery store even once during the past few years, you know how costs have risen. In most cases, “why” seems to be a mystery. But you’re stuck with higher prices and smaller packages, nonetheless.
The construction industry is no different. Supply chain issues, rising material costs, and a dwindling labor pool all contribute to the problem: Even if your home needs minor repairs, it’s going to take significant time and money to tackle them.
The premiums charged every time your homeowners insurance policy is renewed is indicative of this escalation. Even though nothing has changed about your home and its contents, you’ll see an increase in premiums. This seems particularly counterintuitive when you consider that many items in your home are depreciating, rather than appreciating, in value.
Moreover, getting hit with the cost of a major replacement out of your own pocket can be shocking. Spending up to $3,000 to replace an AC compressor struck by lightning means your budget will take a hit as well. You’ll wish you had replacement coverage in a homeowner’s policy to handle it instead.
During the term of your homeowners insurance policy, the insurer can’t raise your premium. The company has to foot the cost of replacement or repair for covered perils, even if those costs have risen. That protects your home and your budget.
Weigh the Risks
Investments are always accompanied by some degree of risk. Insurance companies will evaluate the risk of insuring your home based on multiple factors. Location, value, and claims history will all figure into the equation.
The cost of a homeowners insurance policy premium, surcharges, and deductibles aren’t inexpensive. But protecting your greatest investment is worth that investment as well. Going without isn’t a risk worth taking.
