Do you adjust your property insurance as your loan is paid down?

Question

I'm reading a book right now that suggests it might make sense to lower your property insurance as you pay off more of your loan. So if you take out a $200K policy to cover your $200K house, but then pay down $100K of your loan principal you could adjust your property insurance accordingly to cover only the adjusted $100K loan amount remaining, and not the other $100k + appreciation. He says basically you "self-insure" the rest and many people do this. This is the first I've read of anything like this though.

First of all, does anyone here do this or recommend this move? And second, how much savings are we talking about in making this sort of adjustment?

Account Closed · Answer

There are many factors that went into our decision.

We had one policy cancelled due to a roof being older then 15 years, even though there was nothing wrong with it and had a 30 year guarantee. So we would have had to put a new $6,000 roof on a building just to keep our policy, absurd!

Also, remember, a casualty loss is tax deductible at least in the year it occurred with constantly changing limitations, this means that even if you have a  loss due to some event, the amount of the loss can reduce your taxable income to some extent. You may even be able to amend a previous return!

This is in addition to the savings from the avoided rape by the Insurance blood-sucking leeches, is it sounding like I don't like them?

But as always, speak to your accountant and get a thorough understanding of implications before making such a decision.

And as a previous poster intimated, there is safety in numbers, meaning, the more the properties the greater the risk reduction in such a self-insuring mechanism..

Account Closed · Answer

We have been self-insuring for the last 6 years, 10+ properties. We take the balance that would have been paid to the insurance company minus the taxes we now have to pay and keep that in a separate account gaining interest.

We save app. $15,000 a year by not paying the insurance companies, so we have banked app. $90,000 that would otherwise have gone out.

The policies we had all had large deductibles, which we almost never met, and when we did have a water damage claim, the company, AllState, took the deductible out, paid us a few bucks, and promptly  cancelled our policy.

We got fed up and changed our way of doing business. We have saved more then enough to rebuild a house completely destroyed by fire, which statistically almost never happens.

In addtion, we moved all the properties under a corporate umbrella and bought a liability only policy which covers all the properties for up to 3 million. The cost for this policy is under 2000.

Insurance companies make money by fueling your fear, you must have it, and protecting their profits, refusing to pay claims or not meeting deductibles, it is a complete ripoff and as a business you should look at the cost/benefits of dealing with them or not.

For smaller holdings, and of course mortgaged properties, you may not be able to completely self-insure, but it is worth looking into.

Buffet didn't get rich by paying claims.

Jim Wineinger · Answer

I would encourage people to get the insurance (as necessary) and pay themselves the same amount into an savings account. When the balance is large enough to pay for replacement cost of that home, then discontinue the insurance.

I do a similar thing with appliances and have always found enough in my account to purchase a new one when the time came to place a claim.

The insurance that I can not yet say this for is the injury protection against claims for personal injury that happens on your property.

Steve Babiak · Answer

Your savings is zero when the house burns to the ground.

Will Barnard · Answer

Just to add a few comments here. I feel it would be wise for some of the posters to get some additional insurance quotes. My lowest valued property in TX is worth about $45k and the insurance on it is under $500 per year. All my other policies for TX properties are under $1000 per year, including a property valued at $190k!

Having 10 properties does not seem to be enough in my opinion to warrant the risk of self insurance. While Lucia was fortunate enough to make it up to a large enough savings during this period, without suffereing a major loss, that may not always be the case.
That risk is simply not worth the savings in MY book.

That all said, insurance companies really make their money by investing the fees they collect. Placing yours in a savings account or even a CD does not make financial investment sense to me and therefore, I would continue to pay for the insurance.
Again, just another point of view.

Mark Yuschak · Answer

Lucia is in good company.  I'm battling my insurance company right now too because they're threatening to discontinue coverage on two of my properties.  I'm inclined to think it is a direct result of a recent fire loss this past summer.  The claim was rather small, but now they're looking for every excuse to discontinue coverage on our rentals.

For the one, I'm letting the coverage lapse.  They are demanding that I repair some sagging gutters and repaint the soffits.  Totally ridiculous.  So, I'll assume the risk myself.

Similar to what Lucia has done, I will keep a reserve of cash to cover unexpected incidents which I would otherwise have made a claim.

Scott R. · Answer

At my current time I dont see it being worth it as i dont have enough property, but my properties in Amarillo, Tx have very high insurance rates, I pay nearly $1000/yr for $30,000 in coverage. This is high deductible and covers only like fire damage and tornatos, and isnt replacement value, so I dont see this policy ever paying out much if something did happen unless the property burned to the ground. I think if I had 30+ of the properties and wasnt required to insure them since they currenly have loans i would consiter.
           -Scott

Bienes Raices · Answer

Lucia,
Thanks for posting this, it's interesting to hear about someone who's actually done this. I know it's not a solution for most people, but it's good to know that it's a possible option for those with a lot of properties.

Vikram C. · Answer

Lucia, your situation does make sense but it can be risky for an investor with fewer properties.  Even in your case, you may have felt differently about self-insurance if you had suffered a loss in the early years of your self-insurance plan.

(BTW, Buffett did make money by paying claims.  BRK's subsidiaries actually have a very good reputation for paying claims and that's part of their brand value.  Buffett's wealth has come from investing the insurance float wisely.)

Sage Jankowitz · Answer

Thanks for the clarification guys.

Name of the book is "Building Real Estate Wealth in a Changing Market" By John W. Schaub.

Do you adjust your property insurance as your loan is paid down?

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