Buyers: Don’t Forget to Include Homeowners’ Insurance in Your Budget

The rising cost of home insurance is “where climate change meets the average American’s pocketbook.”

—Forrest Bennett, Oklahoma legislator and insurance agent, as quoted in The New York Times

If you’re like many home buyers, you’ll be glad to be getting a mortgage. It signifies the ability to build equity and break free of a situation where rent could be jacked up every year. If all goes well, buying a home can help bring the deed holder to financial freedom.

So you confidently sign a purchase agreement. Then comes the insurance estimate, and suddenly you know you have to budget for yet another rising cost.

Don’t forget, when browsing those real estate websites, that the monthly mortgage payment estimate doesn’t tell the whole story. Insurance is one of those “extras” that you’ll be funding through your escrow account. And it could rise, steeply.  

Many homeowners with mortgages have escrow accounts. Monthly, these deed holders pay a mortgage servicer, and the servicer then pays local taxes and insurance premiums out of escrow. This way, lenders can be assured that all housing costs are paid, so their collateral is covered.

Earthquakes and Floods, Windstorms and Wildfires

Let’s be frank. Industry professionals cannot tell us what is going to happen. They can only say that our destabilized climate will manifest itself through costlier damage as this century unfolds.

But there are some things we do know. Heavy storms, earthquakes and wildfires, as many of our readers can acknowledge from personal experience, wreak serious havoc on property.

Especially in places that get a lot of tornadoes or hailstorms, roofs aged 10+ years are extremely costly to insure. Some companies are excluding roof damage from their standard homeowners’ policies.

Watch for this when you shop for homes. Your lender might want to know if the seller will get that worn-down roof replaced before closing. Looking ahead, you might speak with your agent about placing that contingency in your purchase agreement.

Tip for deed holders: Be sure to have adequate coverage in place for potential sewer and septic system flood issues. Some companies leave this out of their standard policies.

Explaining the Hikes That Defy Explanation

The premium hikes aren’t arbitrary. Climate impacts are extraordinarily expensive. And now, more than 25% of all U.S. homes — representing $12.7 trillion in real estate — is subject to some kind of “severe or extreme climate risk,” like floods, hurricanes, and wildfires, says a report by economist Jiayi Xu for the new REALTOR.com® Climate Risk Report. 

But why does the typical Oklahoma deed holder pay nearly $3K, while across the state line, the typical Arkansas owner pays under $2K? Could it be possible that homeowners in some states are paying more than their fair share, while homeowners in other states are escaping the worst of the rate hikes?

It could indeed. Research discussed in The New York Times last summer found out how much depends on a given state’s laws and standards. Some states fight off rate hikes. Others do not. “Oklahoma’s current insurance commissioner has never blocked an insurers’ rate increase,” the Times reported. Alabama, Louisiana, and Texas also tend to give companies plenty of leeway to raise rates. Therefore, residents of those states could be paying premiums equal to or higher than 2% of area property values.

On the bright side, Oklahoma has begun offering funds to homeowners for replacing their roofs with hail-proof materials. This should help keep claims (and everyone’s costs) down.  

Tip for deed holders: You can check with a broker who can look for various available rates. The broker gets paid by the companies, not by you. Not all insurance companies are the same, and most won’t inform you when a better rate becomes available unless you raise questions.

Dropping the Customers Who Need Insurance Most?

Insurance companies are declining to issue new policies in California, where rates are strictly regulated and fire risk looms large. Those deed holders who already have policies are at risk of losing them, or watching their premiums shoot up — sometimes doubling in just a few years.

California requires insurers to notify customers at least 75 days in advance of dropping them. That’s not much notice, given the attention and time needed to find replacement insurance. If California’s governor declares a wildfire event is a state of emergency, companies do have to abide by a waiting period of up to 24 months before ditching impacted policy holders.

One company, the QBE Insurance Corporation, has recently told the state it will drop 37,000+ California customers and stop insuring homes. The point, says the company, is to generate better profits — which dipped in 2024 on account of the Los Angeles wildfires. The Palisades and Eaton wildfires racked up higher costs than any previous fires. Claims could reach $40 billion in total.

Also last year, businesses owned by Tokio Marine Holdings announced plans to stop insuring homes and focus on the commercial side of the business. And Crestbrook, part of Nationwide Mutual Insurance Company, began its exit from California as well, reports the San Francisco Chronicle.

The New York Times has been tracking insurance non-renewals since December, calling the mapping of places where policies aren’t renewed “a key predictor of the disruption to come.” You can explore this factor state by state with this mapping tool.

Tip for deed holders: Customers who are dropped can often find policies from other companies, but these policies (or the car insurance they’re bundled with to get the lowest premiums) could be a lot pricier. Here again, calling an independent insurance broker for help could pay off.

Boiling It All Down

This year, property values are calming down — even stalling out. Normally, that would mean a buyer’s market has arrived. But the other “extras” a buyer pays add up. The cost of insuring a home, for one, has risen dramatically in the past few years. The price of a policy premium is significantly outpacing inflation. And in some states, insurers are getting away with charging more than they do in places where disaster damage is far more costly.

Nevertheless, homeownership is still better financially for many people. After all, insurance costs have to be paid for, whether we rent or own.

Please note that Deeds.com does not dispense financial advice. Mortgage consultants and personal financial advisers are the ones to ask for individualized guidance on insurance and money matters.