The Rise of Self-Insurance in Homeownership

Unlike homeowners with mortgages, who are generally required by lenders to maintain insurance coverage, owners of fully paid-off homes often have the freedom to decide whether insurance is worth the cost.

For some, particularly retirees living on fixed incomes, the rising cost of coverage has made that decision more difficult.

Why Are More Homeowners Considering Self-Insurance?

The primary driver is cost. Currently, in the U.S., the average home insurance premium is nearly $3,000 a year. But in some states, like Florida, it’s closer to $10,000 a year. 

Home insurance premiums have risen sharply in recent years due to inflation, increasing construction costs, labor shortages, severe weather events, and growing catastrophe losses. In many parts of the country, annual premiums have doubled or even tripled over the past decade.

Homeowners in high-risk areas often face even steeper increases. Some have seen insurers reduce coverage options, impose higher deductibles, or stop writing new policies altogether.

As premiums climb, homeowners naturally begin asking a simple question: “What are the chances I’ll ever file a claim?”

For owners of older homes with substantial equity or fully paid-off homes, the temptation to save thousands of dollars per year can be strong.

Some view insurance as an expense they may never use. Others believe they have sufficient savings to cover potential losses themselves.

Regional Hotspots for Self-Insurance

While self-insurance can occur anywhere, it is more common in regions facing affordability challenges in insurance.

This chart shows how much average insurance costs can vary by state.

Florida is perhaps the most prominent example. Years of hurricane losses, litigation costs, and insurer insolvencies have driven premiums to among the highest in the nation. Some homeowners report annual premiums exceeding $10,000, creating strong incentives to explore alternatives.

California faces similar challenges, particularly in wildfire-prone regions. As insurers limit exposure or withdraw from certain markets, homeowners may face fewer choices and significantly higher premiums.

Along the Gulf Coast, including parts of Texas and Louisiana, windstorm and flood coverage costs have increased due to hurricane exposure.

In western states vulnerable to wildfires and earthquakes, some homeowners forgo specialized coverage due to the added expense.

The trend is also emerging among retirees nationwide who own their homes outright and are seeking ways to reduce ongoing expenses in retirement. 

The Biggest Risk: Catastrophic Loss

The central problem with self-insurance is that it works until it doesn’t.

Most homeowners will never experience a total loss. However, insurance exists primarily to protect against low-frequency, high-severity events.

A house fire, tornado, hurricane, wildfire, or major flood can cause hundreds of thousands of dollars in damage within hours.

A homeowner who saves $3,000 annually by dropping insurance might accumulate $30,000 in savings over a decade. That sounds significant until a fire causes $400,000 in damage.

At that point, the homeowner bears the entire loss.

Unlike an insurance company that spreads risk across thousands or millions of policyholders, an individual homeowner's risk is concentrated in a single asset. For many families, the home represents their largest financial investment.

The Flood Insurance Problem

One of the most common forms of self-insurance involves flood risk.

Standard homeowners insurance policies generally do not cover flood damage. Separate flood insurance is typically required through the National Flood Insurance Program (NFIP) or private insurers.

Many homeowners decline flood coverage because they are not located in federally designated high-risk flood zones.

However, flooding can occur outside those zones and many believe the flood maps provided by FEMA are no longer accurate.^[2] Heavy rainfall, drainage issues, flash flooding, and changing weather patterns can all create unexpected losses.

A homeowner may spend years without experiencing a flood and conclude that coverage is unnecessary. Yet a single flood event can produce tens or even hundreds of thousands of dollars in uninsured damage.

This creates a situation where homeowners may unknowingly be self-insuring against one of the country’s most common natural disasters.

Hidden Costs Beyond Property Damage

Many homeowners think only about rebuilding costs when evaluating insurance.

However, policies often provide protections that go beyond repairing physical damage.

These may include:

• Temporary housing expenses after a covered loss
• Personal property replacement
• Liability protection
• Medical payments coverage
• Debris removal
• Legal defense costs

Without insurance, homeowners may be responsible for these expenses themselves.

For example, a liability lawsuit arising from an injury on the property could expose personal assets well beyond the home's value.

When Can Self-Insurance Make Sense?

Self-insurance is not necessarily irrational.

Some wealthy individuals deliberately self-insure because they possess sufficient assets to absorb potential losses without jeopardizing their financial security.

For example, someone with a $400,000 home and $20 million in liquid assets may reasonably decide that replacing the property themselves is financially manageable.

The challenge is that many homeowners considering self-insurance lack the financial flexibility to afford it.

In practice, true self-insurance requires setting aside enough money to withstand a worst-case scenario. Few households can realistically accumulate a reserve equal to the full replacement cost of a home, its contents, and related expenses.

The key question homeowners should ask is not whether insurance premiums feel expensive today. Instead, they should consider whether they could comfortably absorb the financial impact of a major uninsured loss tomorrow.

For homeowners who cannot afford to rebuild their homes, replace their belongings, or defend against significant liability claims, insurance remains less about compliance and more about protecting long-term financial security.

Ultimately, self-insurance transfers risk from an insurer to the homeowner. The potential savings are immediate and visible. The financial consequences of a catastrophic loss are far less certain—but potentially far greater.