Math and value and flood insurance

Woke up early and was immediately thinking about one of my last conversations yesterday.  Let’s start with some math;

If you spend $1000 and in return I lower the cost of something by about $3000 what could you consider your return on investment(roi)?  $2000 not bad.  Not bad at all.

So in the first year of this new product you saved $2000 by spending $1000.  Now in the second year(assuming current numbers stay the same) you actually save $3000 since you do not spend the $1000 again.  So you have now made $5000 by investing $1000.  500% return.

Now let’s say you need to keep that product for 10 years so $2000 the first year plus $3000 *12 = $36,000 for a total of $38,000 . **Average time in a home is 13 years** All because you invested $1000.

DISCLAIMER; This is math based on the current situation in flood insurance.  Where a provisional rate is approximately $6000 but if  you invest $1000 there is a very good chance you will see that reduced by about $3000.  With this being a brand new situation(roughly 4 months old) it is to early to make these figures more accurate.

**Real Estate version;

Is not spending $1000 worth losing a buyer?

Is not spending $1000 worth delaying a sale…and possibly losing the buyer?

Is not spending $1000 today worth saving maybe $38,000?

This is no different than upgrading your bathroom, lighting, landscape, paint, etc.

So at the present time here is my explanation as to why I will not guarantee the above; http://www.youtube.com/watch?v=9MGTq0QHWCQ

Let’s look at it another way; DEDUCTIBLE math

So you are getting $250,000 in coverage and want the same $1000 deductible as your home.  Your rate is $6370 BUT factor in you think FEMA is nuts (they are) and you firmly believe there will be NO FLOOD at your home.  So you take a $5000 deductible.  New rate of  $4988 savings of $1382.  The math looks weird, you take on $4000 more in risk but this year you save $1382 plus year two $1382 plus year three and what do you know you are now in the clear (assuming you saved this savings)  risk averted.

Remember insurance is an exchange of risk.  Flood rates are nuts because people were not paying enough into the big pool of insurance.  The only act of government that I believe will fix this is when the government GETS OUT OF THE FLOOD INSURANCE BUSINESS.

When deciding on how to spend your insurance budget don’t just settle for what the crowd says is right.  Your willingness to take on more risk is rewarded with a savings which you should value.  Especially if you place no value on the flood insurance you have to buy.

Just some thoughts.  Please open your mind to some new ideas.

 

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