Is it really necessary - Are there Insurance Alternatives?

Question

I know insurance is just a necessary, but I just have to wonder if there is something else, something better, a better way to do it. On some of my properties I don't have to have insurance, so what if I just saved my insurance premiums and was "self insured?" That way I was in control of my own claims and payouts and didn't have to worry about increased premiums and decreased coverage. Really, do the insurance companies really have my best interest in mind? They've got to make their profits too. Or is this just the reality of being in business and I should count my blessing of being so fortunate to have the opportunity to pay for insurance?

Julie Marquez · Answer

@Allan C. Good too know, thanks!

@Suzanne Player Good information and hope that the rates won't be higher forever. Yes, I need to understand the peace of mind and that it's the cost of doing business (I can hear my wise dad telling me these same pieces of advice). And so right about putting my money to work instead of being my "insurance." What I don't understand is why people get expensive engagement rings to start with!

@Todd Rasmussen knowledge and education is what I need right now with insurance. I had my moment of frustration, now on to responsibility. So thanks @Jeff Copeland!! I was just hoping there was a new medium that exists that can replace insurance and easily give us peace of mind at a low cost. :)

Todd Rasmussen · Answer

@Julie Marquez

You need to reframe how you think about insurance. You should not want insurance for a $5,000 water claim. You should be insuring for a million dollar liability claim. Self insure the small claims by choosing a high deductible. On top of everything else you need to know to be an investor you need to be in the 95% percentile when it comes to insurance knowledge too. You need to know exactly what is covered, how much it is covered for, and what perils it is covered from. If you don't have bank loans, you can absolutely self insure, but unless you are sitting on a million bucks, this strategy is high risk and probably irresponsible towards your tenants.

Insure with a mutual company. If there are excess profits at the end of the year, you get a refund.

Aaron Porter · Answer

@Julie Marquez  I have a few clients that have tried to go the "self insured" route.  Not to say you can't do it becuase I have a few clients that do go the "self-insured" route.

However I want to take a minute and clarify.  Self insurance and no insurance are 2 totally different things.  true self insurance actually means that you set up a mineature insurance company for yourself (or your company)  you get licensed with your states insurance regulatory office and you actually pay yourself annual insurance premiums that go into a totally separate account and you don't get to use the money for anything.  there are major rules about what the money in the "insurance"  account can and can't be used for.  In most cases to do a true "self-insured" strategy if you are paying less that 6 figures of premium it isn't worth it.

There are other strategies including just starting yourself an investment account of some type.  place the money you would normally use into it (something with a zero floor would be preferable unless you can handle a market call on an investment account)  build up the savings account and hope that you don't have any type of large claim.

when it come to the liability side that can add up super quick and if you don't have an underlying property policy having an umbrella policy won't cover you.

I have been looking into starting some type of insurance captive strategy where a group of SFR real estate investors band together to create a mini insurance cooperative in a sense.  Doing this ups your purchasing power with an insurance carrier and can help getting lower rates. But I haven't made it a reality yet.

working with a good knowledgeable top of the game insurance agent who has access to lots of carriers can be beneficial.

Jeff Copeland · Answer

With regards to Property and Casualty Insurance:

If you can truly afford to self insure, great. But understand that the risk you are assuming includes everything from $20k in roof or water damage, to a catastrophic loss. If you can absorb the complete loss of the building (for example, burned to the ground, gone, not salvageable, rebuild from the ground up) and you are comfortable with that level of risk (few people are), then by all means save your money and self-insure.

A middle of the road option to is insure only against catastrophic loss - By keeping your deductibles extremely high and/or waiving certain coverage options, you can reduce your premiums, but also transfer some of the more excessive risk to the insurance carrier.

(Of course, if you ever finance (or refinance) the properties, your lender will require certain coverages and deductibles)

With Regards to Liability Coverage:

Liability is a different animal. With this coverage, you are insuring against death, permanent injury, or scarring of a person (doesn't matter who) that occurs on your property. The landlord is ultimately responsible for everything that occurs on their property.

A water damage claim or roof claim may be in the tens of thousands of dollars, but wrongful death or injury claims are often hundreds of thousands (or even $1M+).

Even if you want to self insure for property and casualty, most insurance pros and attorneys would advise you to at least carry liability coverage. The coverage is often capped at around $300k for homeowners polices, and then an umbrella policy would pick up from there, usually up to $1M or $2M, which covers multiple properties and vehicles for the insured.

I'll send you a PM with some additional info is that's okay.

Allan C. · Answer

@Julie Marquez we maximize deductibles and don’t file claims unless cost is 3x deductible or more.

Suzanne Player · Answer

Your insurance rates go up, but not forever, I think it affects your hazard rates for 5 years or so, but check with an insurance agent/broker.  This can of course change from time to time.

Getting a larger deductible helps, but not much.

It's the catastrophic losses that are the reason we have insurance.  Imagine a perfect storm of massive losses that just, by coincidence, happen to you.  You have lost rent, repair costs, and still have to pay the mortages on whatever properties that have them at the time.  Not to mention the stress it would cause you not to have coverage.  Insurance is just a cost of doing business.  Besides, to self-insure would require massive cash reserves - why not put that case to work buying other properties?

What I don't get is when people buy insurance on an engagement ring or something that's not a necessity (apparantly these aren't covered by your homeowners, they cost a few hundred/year to insure separately)

Julie Marquez · Answer

@Nicholas L. I guess that is the root of the problem, I feel like I pay a lot for insurance. My premium doubled because I had a claim last year, and when I shopped around, I couldn't get anything else because of the claim. What's the point of paying for insurance and paying so much out of pocket for your deductible? In a couple of years I will have paid for the entire claim with the increase in premiums. I guess it is good for catastrophic events, which I hear doesn't go well anyway with insurance companies because they don't actually want to take responsibility.

Matt Devincenzo · Answer

It's all math. What are the actuarials on catastrophic losses associated with rental homes in your area? Your insurance company has that information, and if you intend to self-insure then you need to have the same information. If you are paying $100/mo on 10 homes that's $12K/year. What are the chances of having $12K worth of claims in a given year? What about if one of those claims is the home completely burning to the ground in a given year?

Nicholas L. · Answer

@Julie Marquez

just curious, do you feel like you're paying too much?  Have you tried shopping around and/or increasing your deductible?  Insurance is pretty cheap.

Is it really necessary - Are there Insurance Alternatives?

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