I think it makes sense to only buy insurance for loses that would severely hurt you, or your loved ones. Other than that, don’t buy insurance.

Applying that logic to home insurance: get the minimum home insurance policy required by your mortgage company, a policy with the lowest face value and the highest deductible allowed by the mortgage company.

For liability insurance, I read a good rule is: “to carry at least enough insurance to cover your net worth and the present value of your future income stream.” So that’s $300k liability on the home insurance policies and a $3-10M umbrella policy.

What do you think? I’m looking at the money I’m paying for home owners insurance on my properties, and I'm thinking of lowering the insurance policy limits on the dwelling, while raising the deductible, to the limits allowed by the bank. Am I wrong in my logic? Thanks!

I recently upped my insurance coverage while also upping my deducible. I have a number of mature trees next to homes. The trees are all healthy at the moment, but the winds have gotten worse. So, I decided to make sure I'd be covered if a tree was blown onto a house.

Umbrella policies have a minimum liability requirement of the underlying policies. For mine, I need $300k liability on each house

David, that’s what I think: “I don't plan to use my insurance unless it's a liability claim or total loss”. I would add: or a loss over $30k.

My bank too has a ratio requirement that’s a deductible maximum of 5% of the dwelling coverage, so if the dwelling coverage is $300k, then the max deductible is $15K.

I am frugal and come from a family that my parents grew up with very little. But I learned a very valuable lesson after being in the rental business for 16 years (I'm now on my 41st year as an investor).

Close friends of my parents were a family who invested in income property. They owned over 230 units. Then in 1994 we had the Northridge California Earthquake. They had worked so hard and had paid off all of their apartment buildings. With no loans they all decided to have "limited" fire and liability policy's. Not even enough coverage for rebuilding.

They also decided it was a calculated risk but not to carry any "Earthquake" insurance.

They apartment buildings were all located in the same area, Van Nuys California which was near to Northridge and on the City Blocks that got hit the worst. Their buildings were destroyed.

Three brothers and their wives lost everything. From each having a net worth over 3 million dollars (back then) to having only their personal residence and a few bucks in the bank. The BIGGEST MISTAKE OF THEIR LIVES.

Another friend has a 6 unit on the beach and a 6 unit in Malibu -- all with limited insurance coverage. The property in Malibu got hit with the "Malibu fires" and was destroyed. Because of the area she had limited coverage and couldn't afford to rebuild with only 1/3 the funds. The property on the beach was hit with waves during a storm and also she had no extended coverage for storms, lost that property also. The Malibu property would have been worth 5 million today and the Beach property would be worth 4 million today. That's 9 million down the drain.... all because she didn't want to pay for "extra" insurance coverage....

pcs.marsh.com/us/solutions/liability-coverage-estimator.html

Insurance can be the most cost-effect way of managing risk acceptably. What do I mean?

I bought 5 houses from a retiring investor several years ago. Throughout his career he "went naked" on all his rentals. Over 200 units. He paid cash for units and carried no hazard policy and no liability policy. These were little cheapie houses (FMV $30K-$40K). He did that for almost 50 years. During that time, according to him, he only had 3 fire losses and one liability claim which they settled for around $10,000.

Add up the premiums saved over that amount of time. We didn't get into the nitty-gritty of how many houses he had for how many years, but let's just say he averaged 70 houses for 30 years....no adjustment for inflation....just to give us a spit-wad picture of what MIGHT have been reality...

($400/house fire policy + $30/house liability) policy * 70 houses * 30 years....over $900,000.

That's a lot of money and in hindsight it appears like he made a very wise, calculated decision.

Insurance is statistical. Maybe he was being statistical as well, figuring he'd never have more than a few fires and knowing that few law suits ever go above a $10,000-$20,000. Easy to pay off, right?

About 8 years ago we had a tornado in Joplin, MO about an hour SW of my town. It destroyed about 25% of the town. Imagine if it had touched down 1 hour North East? He could have lost 200 rentals. At $30K each, that's a potential loss of $6 million.

So would you trade $900,000 to be covered at a potential $6 million? That's how insurance works.

You have to analyze your exposure, evaluate the risk and the likelihood, and make a decision that involves trade-offs. Most investors I know would think the investor I bought from was crazy. But it worked for him. He came out almost $1 million richer, and now that he's mostly sold everything even a city-leveling catastrophe wouldn't affect him much.

I couldn't sleep that well at night taking that risk. So you have to decide if going bare-bones insurance to save money is right. I keep $1000 deductibles on my property, because as I go higher the premiums don't drop much. Something like 10+ years without a single loss to break even. Granted, I've only ever had two losses...one was worth $30,000 (total loss due to fire); the other worth about $6,600 (massive tree fell on house & crushed the roof).

Having a low deductible only saves money if you will actually make claims for losses that low. Insurance companies will not hesitate to raise your rates or even drop you if they think you're making too many claims or likely to make more claims in the future. They even keep an industry-accessible database of insurance claims, your and your property's CLUE record

David, I ran the calculator and pretty neat how it explains the liability risks of things like young drivers operating your cars and how being active in social media puts you at risk for lawsuits of libel and slander. I think I will increase the size of my umbrella tomorrow, even thought there’s no rain in the forecast :-) And interesting what you said about low deductibles, rate increases and CLUE record. My adjuster friend talks about all the money you can get claiming a leak ruining your floor, but I guess in the end, you’re the only one that doesn’t come out ahead.

Sid, just to be clear, I’m certainly not advocating not having insurance for large loses. I’m saying the opposite; insure for large losses, but not for a leaking water line ruining your floor. Interesting example you gave, about the tornado and the potential to wipe out all the houses. Robert also mentioned an earthquake and wildfires wiping out lots of properties. It seems important to be insuring for the right perils.

As far as I am concerned all insurance is a ripoff.

If you make a claim they try not to pay but if they do then they up your rates. If you make more than 1 claim then they want to drop you.

6x6,

Love ya, but if you feel this way about insurance you don't understand the vital role insurance plays in individual lives and business.

Of course they only want to pay what they're responsible for. That's business. That's the contract. And as Still Learning observed, when you actually NEED it, you'll switch your thinking 180 degrees.

For my $30,000 loss, I'd only owned that property one year. Paid one $400 premium. I made a massive return on my money. They did not drop my coverage, nor did my premiums increase one penny. We also sold our personal residence late last year. Buyers wanted a new roof (17 years old). It has some hail damage. Insurance covered all but my deductible ($1,300). We got a $9000 roof in exchange. No increase to premium...policy still in effect.

Think about how family life was before life insurance. If the primary bread winner died, unless your family had managed to put aside a large chunk of money, the family was often destitute and the kids had to be sent off to work in the sweat shops (if they weren't already). The widow usually had to remarry for economic reasons, and not always in the prime of her life where she could pick and choose. If she could find a man interested in her....otherwise, life spiraled straight down into crushing poverty. I pay about $330/year for a $750,000 term policy that will expire when I turn age 60. If I die before then, my family will be well-provided for. Peace of mind!

Liability insurance: if you are sued even for a minor amount ($50,000), that is a huge loss for most folks. Liability insurance typically also includes a defense team. They DON'T want to pay out, as you said, so they'll defend you or settle...all on their dime.

Auto insurance: if you've ever been in a wreck, you know the important of this. I hit a patch of ice this past winter and it almost threw us off the road. Guard rail saved us. Insurance paid $1600 to fix the cosmetic damage to our vehicle and I don't know how much to repair the guard rail. My out of pocket was $500. Rates did not increase, policy was not canceled. I've only made once auto claim in 10+ years.

Health insurance: misunderstood and misused today. Don't blame the insurance companies; blame the federal regulators who jumped in to "help" and turned insurance (supposed to be coverage for catastrophic loss vs. "use it all the time") in to a nightmare. But even then, few of us pay the true cost of our medical care. That's caused market distortions and is another topic for another day. Get to know someone in the industry and they can tell you more.

insurance companies very well much deserve the blame for lifetime caps, pre-existing conditions, and the list goes on. We take those for granted now .

We live in a hurricane-prone area. No we don't claim for every bit of damage that might happen, but if we get the big one, we will be very glad we carry insurance. And after Mathew, when we lost the equivalent of 7 or 8 roofs, the insurance really take the sting out of it (no it didn't totally cover it, but it helped!)

Once did a "back of the envelope" calculation adding up my premiums against 3 fire claims. Came out about even-steven. Every fire was tenant error: left a pot on the stove, left a candle burning, kid playing with gasoline.

Well said Sid, and interesting comparison of life before insurance, to today with it. And I agree, it’s amazing how insurance works out sometimes, as far as a small premium and a large payout. Several years ago, I had a fire at one of my rentals. My insurance company paid out $170 k to rebuild part of the house. Amazingly to me, they didn’t drop me, instead my premium dropped a bit to $854 per year. At that rate, if I never file another claim, my insurer will break even in 199 years.

Any yes, health care insurance is not insurance, it’s some strange payment plan. Interesting to note, this distortion started around world war II, when wages were fixed, and employers started giving insurance to attract employees. After some time, the government put into law that health insurance is a not-taxed benefit, when provided by the employer. Health insurance went downhill from there.

Thank you all for sharing your thoughts on this!!

SID, Thank you for sharing your thoughts.

When I had health insurance before through my employer, I had to have some test run for black out issues. Insurance would not pay because of the way the doctor labeled the visit or problem. Other times I needed it they always claimed pre-existing and did not pay but they never minded taking my money every week.

I recently had a theft of my tools on a property and made a claim because that is what I have insurance for. They upped my premium so I may as well had not made a claim.

the BEST asset protection plan is LOTS of insurance and an umbrella to cause insurers lawyers to go to battle for you.

I try to think of it as a logic problem. I had a 25k deductible for a while on all my stuff. The savings was about 8k a year so I thought it made sense as we did not have big losses very frequently. I got a new quote and the savings difference between 25k and 10k was very minimal so 10k is where it is at. I admit the idea of a bad tornado wiping out a few places at a time was daunting with that high deductible.

Hmm...one homeowner quote I have is a $1,028 premium, for $388,000 of dwelling coverage, with a 1% ($3,880) deductible, or a $787 premium with a 5% ($19,400) deductible, for the same property. I figure, if my house burns down in the first case, the insurance company gives me $384,120 ($388,00 minus $3,880 deductible), or it cost me $1,028 to get $384k of coverage, or $2.67 for every $1,000 of coverage. In the second case, the insurance company gives me $368,600 ($388,00 minus $19,400 deductible) if my house burns down, or it costs me $787 to get $369k of coverage, or $2.13 for every $1000 of coverage. It seems then, my way oversimplified math tells me the higher deductible is the better deal. I guess one could respond by saying "if the higher deductible is the better deal, why not go with the highest deductible, that is no insurance” To that I'd respond, I'm ok to pay out $19,400, but not $388,000. I guess if I owned 100 of these properties, and they all burned down, then I’d need to come up with $1.9M to rebuild them (pay the 5% deductible) which would be very bad, however I only own 4 properties, so coming up with $77k to pay the deductible would be do-able.

I think much of the decision on how big of a deductible to sign up for, is based on how you think. I mean would you never forgive yourself if you had to pay out the bigger deductible for a claim? Do you think your rates would go up if you made claim for $6k with the lower deductible?

Well, 6x6, mike and Toddb, thanks for taking the time to write. I really appreciate it!!