Insuring Diamonds and Real Estate

Almost twenty years ago, when I first got engaged, we put my diamond ring on our insurance policy. I’m not bragging about my ring, but it just represented a big chunk of change for two recent college grads. If it fell off while I was swimming in the ocean or got stolen, we couldn’t afford to replace it. We paid an additional premium for this coverage, and to us, it was worth it. Gradually our net worth grew such that we could afford to replace my ring so we dropped the extra coverage. We saved the extra premium, and took the risk ourselves. Lucky for me I still have the ring, the husband that gave it to me, and many years of that extra insurance premium savings!

You’ll need to make similar decisions about insuring your real estate. It’s important to right-size your insurance. My general rule of thumb is to insure the risk you can't afford to take, self-insure for everything else. If a $5,000 kitchen fire is going to sink you, then make sure your insurance deductible is at a level which will keep you solvent. If it would take a total loss of the property to be a problem, then your deductible should be much higher.

Generally, you’d prefer not to make insurance claims. For one, it means there are problems! Additionally, if you file claims, it’s likely your insurance premiums will go up.  This isn't about choosing the hard way on purpose, this is about getting the most value for your money.

Insurance is expensive. Roughly half of every dollar you spend on insurance is going to overhead, and someone else’s profit. That means, on average, you save half. However, the important point there is “on average”. For an insurance company with many policies, the statistics work out. For most of us, we don’t own a statistically large enough pool of properties to trust we’ll get the average. For those of you who like to geek out on the math, insurance is always a negative EV (Expected Value) decision, but it still may be a worthwhile investment.  So dial in your deductible at a level you can afford to handle and is also at a level it will be worth your while to file a claim.

There is an exception. Never self-insure for liability. Liability claims can be huge and you’d prefer to have coverage and your insurance company’s lawyers on your side.

I would also consider eviction protection plans like insurance. If you can’t afford to have the hiccup in your stream of cash flow, then maybe eviction protection is the right thing for you. However, if you can’t afford to have this hiccup, then I might suggest you should be building a healthier reserves pile before you invest.  Vacancy and a few legal fees should be part of normal business costs.

Thanks for reading!  What kind of things do you choose to self-insure?