You may have read a personal finance blog about reducing your car insurance coverage when the vehicle gets older. Or, you might be having financial trouble and looking for ways to cut expenses. Does it make sense to drop your home insurance coverage in these situations, or others? Probably not.
Here’s what you should think about.
Do You Have A Mortgage?
If you have a mortgage, the lender will require you to maintain certain levels of coverage . That way, they know the home insurance company will pay off the loan if something happens to your home. You’ll usually get insurance through the lender or an escrow agent. Or you get your own insurance and name the lender as an additional insured. If you change or cancel your coverage, the insurance company would then usually notify the lender as well.
If your home insurance no longer meets the requirements for your mortgage, that may count as a default. A default means that you’d need to pay the entire balance remaining on your mortgage immediately. If you can’t, the bank could force you into foreclosure.
Is Your House Old?
With older cars that are only worth a few hundred dollars — or even in the low thousands — some people decide to drop collision and comprehensive coverage. They do this knowing they could repair or replace their car from their savings. This can be a smart risk-reward calculation for cars.
For homes, the costs to repair or replace your home plus additional expenses mean it’s almost never worth it to try a similar maneuver with coverage. Major repairs could easily run tens of thousands of dollars. If you’d decide to start over, you’d still need to pay to clear the lot. Your home insurance may also cover additional living expenses —such as staying in a hotel and eating out — that you’d have to cover on your own until you repaired or replaced your home.
What If You Really Need The Money?
Even if you’re really behind on your bills, dropping your home insurance just doesn’t make sense. If you need cash right now, you’re certainly in no position to be able to pay out-of-pocket for emergency repairs or rebuilding. You can shop rates or make sure you don’t have too much coverage, but treat your home insurance as a bill you have to pay, no matter what.