Homeowners Pay for Many Kinds of Insurance
A typical homeowner has multiple insurance policies beyond a standard homeowners insurance policy. Some types of insurance are optional and some are mandatory, depending on your location and whether you have a mortgage. Some insurance policies protect you directly while others safeguard your lender.
Here are common types of insurance policies available to homeowners.
Mortgage insurance protects the lender or investor against default from the borrower, says Anthony Guarino, vice president of public policy development and research at Genworth Financial Mortgage Insurance in Raleigh-Durham, N.C. The borrower pays the insurance premium, even though the lender is the beneficiary. Usually, the premium is added to the monthly mortgage payment.
Private mortgage insurance, or PMI, is required for conventional loans with down payments of less than 20%. Premiums vary according to the characteristics of the mortgage loan and the borrower, Guarino says.
"PMI was created because lenders were unwilling to make loans with a lower down payment because of the risk," says Guarino. "Without PMI, homebuyers would have to come up with a 20% down payment for their purchases."
Private mortgage insurance has a government counterpart: the Federal Housing Administration, which insures FHA loans.
Title insurance protects the policyholder against claims about rightful ownership of a piece of property. If you borrow money to buy a home, your lender will require title insurance.
"Title insurance for the lender is issued for the amount of the mortgage loan and only lasts until the loan is paid in full," says Jeremy Yohe, director of communications for the American Land Title Association in Washington, D.C. "The policy protects the lender to ensure the enforceability of the title."
Regulations about title insurance vary by locality. In some states, owner's title insurance is voluntary, while in others it is mandatory for homebuyers.
"Owner's title insurance is typically issued in the amount of the purchase price of the home and is good for as long as the owner retains the property," Yohe says.
Homeowners insurance, also known as hazard insurance, is required by the lender if you have a mortgage. If you pay cash for your home this insurance is optional, although financial experts recommend insuring your property against fire, theft and other potential losses.
"The idea of homeowners insurance is to be able to replace the property to the condition it was in the minute before the loss occurred," says Dan Muhlenkamp, owner of the Preferred Insurance Center in Coldwater, Ohio. "The lender doesn't want the property to be worth less than the value of the mortgage, so that's why lenders insist on insurance coverage."
After a loss, you will receive payment directly from the homeowners insurance company after a claim is processed. In some cases, your lender's name will also be on the payment.
"An insurance company will help you figure out how much coverage you need based on an estimate of what it costs to rebuild the home," Muhlenkamp says.
Some lenders require homeowners to pay their home insurance premiums through an escrow account with their mortgage payment in order to make sure the policy is kept current, but homeowners can sometimes opt to pay the premiums on their own.
Homeowners insurance covers most things, Muhlenkamp says -- fire, theft, wind damage "and even things like a deer running through your window." But a standard homeowners policy doesn't cover everything. "That list of exceptions is fairly long and includes things like acts of war, earthquakes and floods," Muhlenkamp says.
Homeowners can add "endorsements" to their homeowners policies to cover losses from events that aren't covered by the standard policy.
"Earthquake insurance can be added to a standard policy, but the price varies widely according to where you live and how likely it is you'll have an earthquake," Muhlenkamp says. "The deductible for an earthquake is a lot higher than your normal deductible, usually 5 (percent) or 10% of your coverage. On a $300,000 home, that means the deductible would be $15,000 or $30,000."
Flood insurance is an entirely separate policy, bought from the federal government.
"If you live in a designated flood zone, you'll be required by your lender to buy flood insurance," Muhlenkamp says. "Even if you are not in a flood zone, you should probably consider buying it after doing some investigation into the likelihood of a flood at your home. Flood damage can be very costly and will not be covered by a standard homeowners insurance policy."
Muhlenkamp recommends a "water backup of sewers and drains" endorsement on a standard homeowners insurance policy for all homeowners with a basement because it’s an inexpensive add-on that will provide coverage if a blockage causes water to flood the basement.
Personal Property Insurance
Homeowners insurance policies generally provide a designated level of coverage for personal property, but Muhlenkamp recommends buying supplemental coverage for items such as jewelry, art, collectibles or guns that are not covered by the standard policy.
While you may not need every one of these insurance policies for your home, you should review your insurance coverage annually to make sure your assets are appropriately protected.