Does the Cost of Insurance Threaten Homeownership?

Risk

I live in the suburbs of Denver, Colo. My home is hundreds of miles from any ocean, and too distant from riverbanks, to make it a flood risk. I’m nowhere near the wildland-urban interface, where looms the ever-present threat of fire. Tornadoes here are rare, and hurricanes unheard of.

Wishful Thinking?

That innocuous profile pretty much describes the towns of Louisville and Superior, about thirty miles north of me. But that didn’t stop a wind-fueled firestorm from destroying nearly 1,000 homes there in December 2021.

An event as improbable as the Marshall fire would have been unimaginable a generation ago, all the more in the wintry month of December. But once-in-a-lifetime natural disasters have become so commonplace we’re learning about the next before we’ve had time to wrap our heads around the last.

Risk Pooling

Risk pooling—the business model whereby the many subsidize the few—demands we all pay for events like the Marshall fire. Fair or not, this means homeowners who live in relatively “safe” areas pay to subsidize those who do not.

In large part, this fact explains why increases in my homeowners premiums have rapidly outpaced the cost of housing construction.

Loss of Coverage

If you have a mortgage, your lender almost certainly requires you to carry homeowners insurance. There’s a reason for this. Your lender has a stake in your home equal to the balance of your loan.

If your house burns down, you can be sure the lender will be rooting for you to make good on that stake. It stacks the odds in its favor by requiring you to carry homeowners insurance equal to the task.

Cancellation

But what if you own your home outright? With no lender holding your feet to the fire, you are free to drop your homeowners insurance. Of course if you do this your protection against damage or loss is limited to what you can afford to pay out of pocket.

Voluntary cancellation may sound crazy. But in the face of skyrocketing premiums, that is precisely what a growing number of homeowners are doing.

Even if they want to carry insurance, some homeowners can no longer afford to. If they stop paying premiums, they’ll lose their coverage.

Related: Should You Pay Off Your Mortgage?

Nonrenewal

In some cases, insurers are dropping coverage even for those willing to pay high premiums. Such homeowners have no choice but to find an insurer willing to take on the risk. If none exists, the homeowner assumes all of it.

Not surprisingly, cancellations and nonrenewals are rising fastest in high-risk zones; typically in the coastal southeast (hurricanes) and desert southwest (wildfires).

While it’s easy to draw a straight line from the increase in natural disasters to increases in premiums, cancellations and nonrenewals, forces less obvious could be making the problem worse.

Regulatory Disparity

Every state in the U.S. has an insurance commission that regulates private insurer rate increases in their state. Some states’ commissions are more lenient than others.

For example, Oklahoma’s insurance commission has never denied a rate increase. The commission’s rationale is that markets, not regulators, should set rates. California’s insurance commission takes a more consumer-friendly approach, making it much harder for insurance companies to raise rates there.

Now consider that, as a share of home value, many Oklahomans pay more for homeowners insurance than their counterparts in California. In some California ZIP codes, for example, homeowners pay as little as .05% of the market value of their home in premiums; whereas in areas of Oklahoma the average premium is 3.5% of home value (the national average is about .5%).

What’s Wrong with This Picture?

Sure, Oklahoma sees its share of severe weather. But California experienced more than 8,000 wildfires in 2024 alone, burning more than a million acres and destroying nearly 2,000 structures. Some estimates put the cost of the Los Angeles fires alone at upwards of $250 billion.

If national insurance companies are hiking rates in states whose commissions are a rubber stamp for rate increases to subsidize those that are not, this would represent a perverse distortion of the insurance market.

It is not only unfair to homeowners in states with lenient commissions, particularly those less prone to natural disasters, it encourages development in high-risk zones while discouraging it in low-risk ones.

The Impact on Home Value

If your home becomes uninsurable, what will be the impact on its market value? For starters, the buyer pool will be reduced not just to those who can afford to pay cash for it, but also those who are willing to self-insure. This reduction in demand will put considerable downward pressure on the market value of your home.

Even if your home is insurable, exorbitant premiums will rule out all but the wealthiest of buyers; they will surely demand a substantial discount as compensation.

As home equity represents the greatest share of middle-class wealth in America, these forces threaten to wipe out a huge chunk of it.

Solutions

These trends are indeed troubling, and raise serious questions about the viability of homeownership going forward. But there are a few things homeowners can do to stem the tide; at least in the short term.

Call Your Insurance Agent

I mentioned at the outset that the premium to cover my home in 2025 came in at $3,089. This prompted me to call my insurance agent. By the end of that call, I had lowered my premium to $2,839, and done so without degrading my coverage.

In fact, I actually increased coverage on my dwelling; the single most consequential component of my homeowners insurance. This increased my premium by $128, but not enough to offset $378 in other savings.

Reduce Unnecessary Coverages

First, review your declarations page line by line to make sure you are not paying for coverages you don’t need, or too much for those you do.

For example, I reduced my personal property coverage from 75% to 25% of dwelling coverage. 75% of dwelling coverage was the amount arbitrarily assigned by my insurance company, and represented a substantial overvaluation of the contents of my home.

This change saved me $96 annually.

Increase Your Deductible

Second, evaluate the risk-reward tradeoff on the size of your deductible. By increasing mine from .5% to 1% of dwelling coverage, I saved $282 annually.

The calculus for me is simple: The risk of submitting a claim is low. And if I do have to submit a claim, I have more than enough cash on hand to cover a deductible equal to 1% of my dwelling coverage.

Take Advantage of Discounts

Third, if you are eligible for discounts, make sure they are being deducted from your premium. For example, I receive loyal-customer and auto-bundling discounts from my insurer amounting to $1,922 annually.

Many insurers offer discounts to homeowners who take risk-mitigation measures, as well. These could include home security systems, water leak prevention devices, and/or systems that prevent or suppress fires. If you have any of these systems or devices in your home, make sure to ask your agent about discounts.

Make Sure You’re Not Underinsured

Fourth, make sure you are not underinsured. I asked my agent to estimate the replacement cost of my home using a building cost calculator. My existing dwelling coverage was too low according to the calculator, so I increased it to the amount it recommended.

This increased my premium by $128. But combined with the aforementioned discounts, I still netted $250 in annual savings.

Shop Policies

Finally, if after talking to your insurance agent you still aren’t satisfied, shop around. I received no fewer than a dozen competing offers this renewal season, with premiums ranging from $727 to $3,240, from local insurance brokers.

Of course this wide range in premiums reflects an equally wide range of coverage levels. So make sure you compare apples to apples before considering a switch.

Kill Switch

If my homeowners premiums become unaffordable, or no insurance company will agree to cover me, I will be faced with difficult choices.

One option would be to pay off my mortgage and drop insurance. Just having this option puts me in rarefied company; a lot of folks simply can’t afford to do this.

But even then I’d be in a pickle, and not just because I’m self-insured. At that point, the cost to rebuild my home may well exceed its market value.

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[I’m David Champion. I retired from a career in software development in March 2019, just shy of my 53^rd birthday. To position myself for 40+ years of worry-free retirement, I consumed all manner of early-retirement resources. Notable among these was CanIRetireYet?, whose newsletters I have received in my inbox every Monday morning since 2015. CanIRetireYet? is one of exactly two personal finance newsletters I subscribe to. Why? Because of the practical, no-nonsense advice I find here. I attribute my financial success in no small part to what I have learned from Darrow and Chris. In sharing some of my own observations on the early-retirement journey, I aim to maintain the high standard of value readers of CanIRetireYet? have come to expect.]

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