Homeowners choose minimal insurance due to rising rates. How risky is it?
In an economic climate where a staggering 20 percent of aspiring homeowners doubt their ability to ever afford a home, those who have navigated the complex path to homeownership are now facing a new financial hurdle: soaring homeowners insurance rates. The increased expense has sparked a critical dilemma for some. Should homeowners opt for minimal coverage to ease financial strain even though this approach exposes them to greater risk?
Bankrate delves into this pressing issue, offering a comprehensive analysis of the underinsurance trend. Learn about the driving forces behind the rise in home insurance premiums and measures being taken to address these challenges, plus actionable steps to help mitigate costs without compromising on coverage.
Why are homeowners choosing minimal coverage?
In the face of rising home insurance rates and economic uncertainty, a significant portion of homeowners are gravitating toward minimal coverage options. Compounding the issue, Bankrate’s Annual Emergency Savings Report found more than half of Americans (56 percent) wouldn’t pay for a sudden $1,000 bill from their emergency savings — 35 percent would borrow money, including 21 percent who would finance the expense with a credit card and pay it off over time. This reality is particularly poignant for homeowners, as typical insurance deductibles range from $500 to $2,500 in the event of a covered claim.
For some, the allure of securing lower premiums by forgoing adequate coverage and electing higher deductibles could be a product of financial anxiety, with inflation, rising interest rates and job security concerns exacerbating these pressures. In fact, Bankrate’s Financial Wellness Survey found 52 percent of Americans say money has a negative impact on their mental health, up from 42 percent in 2022.
The decision to opt for minimal coverage — or to skip insurance altogether if your mortgage is paid off — is often a balancing act between immediate financial relief and the potential long-term ramifications of being underinsured. The gamble becomes evident in the face of natural disasters or other unexpected damage. The absence of adequate insurance in such scenarios can lead to financial ruin, far outweighing the short-term savings.
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What does it mean to be underinsured?
Even homeowners with an active home insurance policy might not have the coverage they need to financially protect themselves. Whether intentional or not, here are some ways homeowners could be underinsured:
- Low coverage limits: Your coverage limits for each coverage type in your policy are generally determined by your insurance company during the quoting process, but you may have the option to adjust these limits. With inflation and rising prices, your existing limits may not be enough anymore.
- Missing coverage types: Endorsements are policy add-ons that extend your coverage limits or provide coverage for perils not covered by a standard policy. One key example is flood insurance. Flooding is not covered by a standard home policy. If your home is damaged by a flood and you don’t have a flood policy in place, you would have to pay for those repairs yourself.
Some homeowners may be underinsured to save money while others may not be aware that they don’t have the coverage they need in place. One of the best ways to assess whether you could be underinsured is to speak with a licensed insurance agent. They can help you evaluate your home’s risk exposure and provide insight into what it would cost to rebuild your home and replace your belongings after a total loss. They also will be familiar with the cost of materials and labor in your area.
Why are home insurance premiums rising?
Several critical factors are at play when it comes to rising house insurance costs. Notably, insurers have faced financial strain. According to data from the Insurance Information Institute, companies paid out an average of $1.10 for every $1 in premiums collected in 2023. Additionally, inflation has markedly influenced the average home insurance cost, with the escalating prices of materials and labor for repairs and reconstruction increasing substantially.
No longer confined to traditional high-risk zones, natural disasters are contributing to the spike in premiums, as well. The broadening scope of destructive weather events means that more homes are at risk, necessitating higher premiums to cover the increased likelihood of claims. As affordable coverage becomes more difficult to find, homeowners are left weighing their options, balancing the desire for appropriate types and levels of coverage with the practical need to manage their budgets.
How much is homeowners insurance in 2024?
As of 2024, the average cost of homeowners insurance in the U.S. is $2,151, but individual rates can vary widely depending on several factors. These typically include the home’s location, construction type and age, as well as the homeowner’s claims history and credit history. As noted, home insurance has seen increases in average premiums over the years, likely influenced by a combination of economic circumstances and industry-specific developments like rising material and labor costs.
Below, average quoted premiums sourced from Quadrant Information Services provide a glimpse into insurance rates for homeowners carrying $150,000, $300,000, $350,000, $450,000 and $750,000 in dwelling coverage, providing insight into how coverage limits also influence insurance costs.
| Dwelling coverage | 2024 avg. home insurance rate |
|---|---|
| $150,000 | $1,274 |
| $300,000 | $2,151 |
| $350,000 | $2,450 |
| $450,000 | $3,046 |
| $750,000 | $4,824 |
Read more: How to estimate your home insurance costs
What are the risks of being underinsured?
Being underinsured threatens homeowners’ investment in their property. Imagine, for instance, a quaint, older residence in Ohio that’s demolished by a tornado. Say the property is insured for $150,000 but the actual cost to rebuild in today’s market is $250,000. The homeowners would face a staggering $100,000 out-of-pocket gap. It’s a more prevalent scenario than one might think, with 57 percent of U.S. adults having incurred costs due to an extreme weather event in the last decade, according to Bankrate’s Severe Weather Financial Impact Survey. What’s worse, data suggest disasters like these are increasing in frequency and expense.
Underinsurance doesn’t just apply to the structure of a home but can also extend to its contents, encompassing everything from daily-use items to valuable personal belongings. Selecting the right insurance coverage, therefore, means carefully evaluating rebuild costs and the worth of personal property to make sure both are adequately covered. Liability and loss of use coverage are also worth considering since inflation and rising prices affect everything from the cost of hiring a lawyer to booking a hotel room.
How can homeowners mitigate these risks?
To mitigate the risks of underinsurance, homeowners can take proactive steps to make sure their coverage aligns closely with their actual needs and the value of their property. Here are several suggestions.
- Regularly review your policy: Review your insurance policy annually or after making significant changes or improvements to your home to ensure your coverage is up to date and reflects your current needs.
- Understand your policy: Familiarize yourself with what your insurance policy covers and what it doesn’t. Clarify terms and conditions with your insurer to avoid surprises when filing a claim.
- Assess the replacement cost: Be sure your coverage aligns with the current cost to rebuild your home, taking into account changes in construction costs and building codes. Tools like home replacement cost estimators can provide insight.
- Inventory your belongings: Keep a detailed inventory of your possessions with photographs and receipts. This practice helps in accurately determining the value of your personal property and ensuring it’s adequately covered.
- Consider additional coverage: For regions prone to specific natural disasters like floods or earthquakes, consider additional coverage since standard policies may not cover these risks.
- Improve home security and safety: Enhancing your home’s safety with systems like fire alarms and security systems can improve peace of mind. Plus, you might qualify for home insurance discounts.
- Consult with professionals: Speak with an insurance professional to learn the ins and out of your current coverage and coverage gaps and to optimize your policy based on your unique circumstances.
Frequently asked questions
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Carrying home insurance is not required by law, but if you have a mortgage, your lender will typically require you to have enough insurance to cover the loan amount or the cost of rebuilding your home. While not legally mandated, having home insurance is advisable to protect the financial investment you’ve made in your property — even if you’ve paid off your mortgage.
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Homeowners insurance typically encompasses three fundamental levels of coverage: actual cash value, replacement cost and guaranteed/extended replacement cost. Understanding these levels can help clarify what home insurance covers and help you choose a policy that aligns with your needs and financial situation.
- Actual cash value: This covers the cost to repair or replace your property minus depreciation.
- Replacement cost: These policies reimburse the full cost of repairing or rebuilding your home at current prices, without deducting for depreciation.
- Guaranteed or extended replacement cost: Offers the most comprehensive coverage, paying to rebuild your home even if costs exceed your policy limit, usually up to a specified percentage.
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Determining the right amount of insurance coverage for your home is pivotal. It’s generally recommended to have enough coverage to rebuild your home and other property structures at current construction costs, not market value. This includes considering the costs of materials and labor. It’s beneficial to also factor in coverage for personal property, liability and additional living expenses. To be sure you have adequate coverage, you may want to discuss your specific situation with your insurance company, as they can provide tailored advice based on your home’s characteristics and your personal needs.
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The 80/20 rule in home insurance is a suggested guideline to insure your home for at least 80 percent of its replacement cost. Not adhering to this rule could mean that, in the event of damage, your insurance might only cover a portion of the costs, leaving you with a significant financial burden. It’s also important to remember to adjust your coverage — especially after making improvements that could increase your home’s value — to ensure you’re adequately financially protected.
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Methodology
Bankrate utilizes Quadrant Information Services to analyze April 2024 rates for all ZIP codes and carriers in all 50 states and Washington, D.C. Quoted rates are based on married male and female homeowners with a clean claim history, good credit and the following coverage limits:
- Coverage A, Dwelling: $150,000, $300,000, $350,000, $450,000, $750,000
- Coverage B, Other Structures: $15,000, $30,000, $35,000, $45,000, $75,000
- Coverage C, Personal Property: $75,000, $150,000, $175,000, $225,000, $375,000
- Coverage D, Loss of Use: $30,000, $60,000, $70,000, $90,000, $150,000
- Coverage E, Liability: $500,000
- Coverage F, Medical Payments: $1,000
The homeowners also have a $1,000 deductible, a $500 hail deductible and a 2 percent hurricane deductible (or the next closest deductible amounts that are available) where separate deductibles apply.
These are sample rates and should be used for comparative purposes only. Your quotes will differ.
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