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Perpetual insurance for house insurance?
Old 02-21-2015, 03:56 PM   #1
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Perpetual insurance for house insurance?

Does anyone on this forum have experience with perpetual insurance for insuring their house?

I recently received an invitation in the mail to consider Baltimore Equitable Insurance, which sells perpetual insurance to house owners in MD and PA.
I had to google it to learn more:
Perpetual insurance - Wikipedia, the free encyclopedia

Currently I am paying $355 a year for a conventional house insurance policy, which covers the building up to $238,000. The perpetual insurance will require a refundable deposit of $11,000 to get a similar coverage for my house. The deposit can be received back if I cancel the policy, considering that the insurer is still in business. $11K sitting in a bank savings account generates 0.9% at the current rate - $99 per year minus taxes. It looks like I can save at least $254 per year in exchange for the additional risk of losing the deposit if the insurer goes bankrupt.
I can switch back to the conventional coverage and get my deposit back if bank rates get significantly higher, I need cash to cover unexpected expenses or if the insurer loses its current A+ insurance company rating.
Am I missing anything?
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Old 02-21-2015, 04:25 PM   #2
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Very interesting. I spent 25 years in the insurance business and have never heard of perpetual insurance, and I saw some really weird things over my career.

Just off-the-cuff there doesn't seem much to object to... they have a high level of surplus and their A.M. Best rating is solid. However, given that 85% of their assets are stocks, which is unusually high for an insurer, is part of the reason that they have/need so much surplus.

I would suggest that you ask the company for their A.M. Best report (or get it directly from A. M. Best) and read it.

I guess the problem I have with the $99 is I tend to doubt that someone would adjust their AA for an $11k reduction in their invested assets, so it seems to me that the more proper rate to use is your overall earnings rate rather than your earnings rate on cash. Assuming that, if your portfolio generates an an after-tax return of more than 3.2% then wouldn't you be better off just staying the course and keeping the traditional insurance?
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Old 02-21-2015, 04:49 PM   #3
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Quote:
Originally Posted by Pasha View Post
Does anyone on this forum have experience with perpetual insurance for insuring their house?

I recently received an invitation in the mail to consider Baltimore Equitable Insurance, which sells perpetual insurance to house owners in MD and PA.
I had to google it to learn more:
Perpetual insurance - Wikipedia, the free encyclopedia

Currently I am paying $355 a year for a conventional house insurance policy, which covers the building up to $238,000. The perpetual insurance will require a refundable deposit of $11,000 to get a similar coverage for my house. The deposit can be received back if I cancel the policy, considering that the insurer is still in business. $11K sitting in a bank savings account generates 0.9% at the current rate - $99 per year minus taxes. It looks like I can save at least $254 per year in exchange for the additional risk of losing the deposit if the insurer goes bankrupt.
I can switch back to the conventional coverage and get my deposit back if bank rates get significantly higher, I need cash to cover unexpected expenses or if the insurer loses its current A+ insurance company rating.
Am I missing anything?
How is your insurance coverage adjusted due to inflation? Is this $238,000 indexed to inflation, or a nominal $238,000 for as long as you have the coverage? After 10 years, with just 2% construction inflation, you'd need a policy with approximately $290,000 of coverage for replacement in a total loss (all other things equal).

Same question for liability - most homeowners policies include some liability coverage. In just 10 years from now, your current liability coverage will be worth about 21% less with just 2% inflation if the nominal limits remain the same with this policy.
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Old 02-21-2015, 05:08 PM   #4
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Originally Posted by pb4uski View Post
Assuming that, if your portfolio generates an an after-tax return of more than 3.2% then wouldn't you be better off just staying the course and keeping the traditional insurance?
Thank you, pb4uski, I'll review their A.M. Best report.

I tend to use a bucket investment approach, where each bucket has its own risk/return/liquidity/time frame parameters. It looks like a perpetual insurance deposit can be used as an emergency fund, therefore it can be a good alternative to a CD or a bank savings account.
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Old 02-21-2015, 05:24 PM   #5
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Originally Posted by MooreBonds View Post
How is your insurance coverage adjusted due to inflation? Is this $238,000 indexed to inflation, or a nominal $238,000 for as long as you have the coverage? After 10 years, with just 2% construction inflation, you'd need a policy with approximately $290,000 of coverage for replacement in a total loss (all other things equal).

Same question for liability - most homeowners policies include some liability coverage. In just 10 years from now, your current liability coverage will be worth about 21% less with just 2% inflation if the nominal limits remain the same with this policy.
Good questions!

From the company web site:
"Your "quote" or the amount of your refundable deposit is based on the cost to rebuild your home today. But as we all know, costs to rebuild—material and labor costs—go up as the years go by. That's why we review your files each year and make a recommendation to keep you up date. These increases are generally small—typically under $200. Other changes in coverage can occur if you remodel or add to your home. The good news: unlike premiums from a traditional insurance company, your rate will never go up. So even if you do have to add coverages, you'll be doing it at the original cost per thousand."

I accept future increases in the required deposit similar to premium increases in the case of the traditional insurance.
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Old 02-21-2015, 05:51 PM   #6
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Where available Perpetual Insurance can be a good deal. With standard insurance you pay in after-tax dollars, for example, dollars generated from investments. With perpetual insurance, you instead invest those dollars in the insurer, and pay no tax on their "earnings" (your insurance coverage). Due to inflation you'll probably need to increase that investment annually by sending the insurer more dollars, but if you decide to cancel you get that money back.
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Old 02-21-2015, 07:00 PM   #7
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The big thing with perpetual insurance (and I have looked at these policies in the past) is that you are extending a non-SEC filing insurer a chunk of cash on an unsecured basis. You would want to be very, very sure they will be around in the future before doing so. Once you have satisfied yourself on that account, then you can see whether it makes financial sense to do so.
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