Dont Drop Your Homeowners Insurance During The Recession
Times are tough, and most consumers are looking to cut corners wherever they can. One place that seems like it might not matter much is your homeowners insurance policy. You never use it, so it seems like money down the drain. Year after year, every month, several hundred dollars that doesnt seem to have a purpose.
If youre struggling with day-to-day financial difficulties, perhaps even having trouble paying your mortgage, then the insurance policy might seem like its not so critical. After all, why pay to insure a place that you can barely afford to keep?
When you drop your insurance policy, its called going bare. And before you do so, you should ask yourself some important questions.
1.Can I drop my insurance? If you have a mortgage, the answer to this question is probably no. Mortgage lenders require an insurance policy be in place, and they do check, usually on a semi-annual basis. If they discover that your homeowners insurance has lapsed, they may demand that you begin paying into an escrow account so that they can be sure the premium is paid regularly. And if you refuse to pay into that escrow account, they can declare your mortgage in default and start foreclosure proceedings against you.
2.If you dont have a mortgage on your house, then the question becomes, Should I drop my insurance? The only reason why you should ever say yes to this question is if you can manage to keep an emergency fund on hand, which is called self-insurance. This means you take the responsibility on yourself, and you will be required to pay for all repairs or replacement that may be necessary. If you cant afford to make the repairs, if your emergency fund is not large enough, you would have to either borrow money, or not fix the house.
3.How large should the emergency fund be? Consider all of the items that would need to be replaced in case of a worst case scenario, like a fire. Not only would you need to repair the house, but you would also need to replace items that were damaged. These items may include furniture, clothing, electronics. You would need to pay for living expenses on a rental while your house is uninhabitable and being repaired. These expenses can be astronomical. To calculate them, take a look at the coverage provided by your homeowners insurance. There is probably a repair-and-replace figure for the house, another number for personal belongings, and a third for living expenses while the house is uninhabitable. Add those three numbers up. Can you really afford an emergency fund that big?
It might seem like a smart idea to drop your insurance for a little while, just so you can get through the economic downturn, and you might intend to re-establish your insurance after the rough times are over. Beware, though, that this plan can seriously backfire on you. Many insurance companies will not take you back, or they will increase your premiums dramatically. They may think that you are unreliable, that you will not be dependable with your premium payments. Or they may be afraid that you are only re-establishing coverage because you plan to make a claim soon. You cannot think that you will be able to just start back up right where you started.
With all of these questions and answers in mind, take another look at the cost of your insurance premiums. Maybe now they dont seem so unreasonably expensive.
by: Leslie R. Wright