Can You Protect Your Home (and Your Money) Without Traditional Insurance?

The average annual homeowners insurance premium in 2023 is $1,787, and this price can be a lot higher for those who live in areas prone to natural disasters and those who own large homes. It's natural to wonder whether it's worth paying thousands per year for home insurance, especially if you've owned your house for years and never filed a claim.

Below, we'll take a look at what would happen if a homeowner chose to forego coverage -- and why you might not be able to go without homeowners insurance even if you want to.

What happens if you skip homeowners insurance?

In the best-case scenario, not purchasing homeowners insurance could save homeowners a few thousand dollars per year. They could put that money toward debt repayment or saving for their long-term goals. But these benefits aren't worth the huge risk homeowners run if they need to file a claim.

Only about 5.3% of homeowners filed an insurance claim in 2021, according to the Insurance Information Institute. But the average cost per claim was $16,048. In this scenario, homeowners without insurance would have to pay for all these damages out of their own pocket. And if they didn't have enough money, they may have to take on debt to cover it, which could impede their ability to save for their future.

And that's not even the worst-case scenario. If a home burns down or is destroyed by a tornado or hurricane, the homeowner might need to rebuild from scratch. This will almost certainly cost hundreds of thousands of dollars, even for a small home. And to make matters worse, building costs can get expensive very quickly in areas hit by natural disasters as many homeowners scramble to have their homes rebuilt at the same time.

Even though the risk of filing a claim is small, it's much easier for a homeowner to make room for an insurance premium in their budget than to come up with the cash for a full rebuild on the spot. So it's a good idea for all homeowners to ensure they have adequate home insurance coverage. And you might not have a choice.

Who needs homeowners insurance?

Homeowners with mortgages are almost always required to have a comprehensive homeowners insurance policy in order to get their loan approved. Mortgage lenders do this to ensure their asset is protected. After all, if the homeowner fails to make their mortgage payments, the house becomes the bank's property.

If the homeowner didn't have insurance, they could just stop making their payments in the event of a home-destroying disaster and the bank would be left with no way of getting its money back. And it probably wouldn't be in business very long either.

That's why homeowners are usually required to provide their mortgage lender with proof of insurance before their loan is approved. If the homeowner switches insurance providers and fails to notify the bank, the bank will likely reach out and ask for proof of insurance within a certain number of days. Without this proof, the bank can foreclose upon the home.

How do you save on homeowners insurance?

Rather than skipping homeowners insurance, try the following tips to keep insurance premiums as low as possible.

• Shop around: Compare rates from several insurance companies before purchasing a policy. Every company assesses risk differently, which is why each gives a homeowner a unique rate.
• Check for discounts: All home insurers offer some discounts to help customers save. More discounts doesn't always translate to the lowest possible rate, but they can help. Homeowners might be able to bump up their savings by taking steps like installing storm shutters or a new roof to take advantage of discounts for these items.
• Raise the deductible: Deductibles are the out-of-pocket costs that homeowners pay in the event of a claim. Going with a higher deductible can reduce monthly premiums.

Taking these steps can help homeowners strike the best balance between saving money and getting the coverage they need. It's also a good idea to review homeowners insurance coverage every year. Homeowners might need to increase their policy limits to keep up with rising costs in their area, and they may also want to compare rates again to see if they can find cheaper coverage elsewhere.