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Home insurance protects your home in the event you need to repair or rebuild, but is home insurance required to own a home? While it may offer some benefits, a policy may represent a significant increase in your monthly expenditures. Let’s learn more about house insurance, whether it’s required, and what to consider when getting it.
What is home insurance?
A homeowner’s insurance policy covers the cost of repairs to your home, as well as other costs. When fire, smoke, theft, or vandalism damages your home, a policy will pay for the repairs. Policies usually cover damage from significant weather events like wind, hail, and lightning.
You may have broken windows or damaged roofing that the policy will cover when you make a claim. A policy will cover the replacement cost of certain items in the home and may also pay for additional living expenses when you can’t live in your home until it’s fixed.
Payments are often sent to an escrow account with the mortgage payment and paid quarterly or yearly.
Some things you might assume a policy covers automatically aren’t actually part of standard policy. For example, events like earthquakes aren’t a covered loss in most cases. You may need to purchase a separate policy or extra coverage to get protection for earthquake damage.
Homeowner’s insurance also doesn’t pay for problems when damage occurs from neglect of the property. For example, your policy won’t cover termite damage because companies consider insect removal as the responsibility of the homeowner.
Is home insurance required?
The short answer to whether a policy is required is “sometimes.” Depending on your situation, your loan company could require that you have a policy. In other circumstances, the decision to talk to an insurance company about a policy is up to you. If you own your property outright, no one can compel or require you to get insurance.
You are not legally required to have homeowners insurance coverage. There are no state or federal laws that require you to get a policy. However, if you’re not otherwise required to get a policy by your mortgage lender, you may still find it in your best interest to explore the benefits and learn what insurance protects and added benefits like additional living expenses coverage.
Why do lenders require homeowners insurance?
When a lender agrees to lend you money to buy a house, they want the assurance that the property will receive repairs in the event of damage. The bank has a financial interest in seeing the property kept in good condition, and the lender will require that homeowners obtain a policy to protect their investment in you.
In the event, your home is affected by fire or some other disaster, the lender will receive money from the insurance coverage, even if the house is completely destroyed. Insurance protects your investment, as well as the bank’s investment.
Note that you may need to add flood insurance coverage or hazard insurance for water damage if your home is located in an area vulnerable to flooding. The Federal Emergency Management Agency (FEMA) publishes maps that indicate whether a location is susceptible to floods.
Should homeowners get insurance?
You may want to weigh the pros and cons of getting a homeowner’s insurance policy even if your mortgage company doesn’t require it. Insurance cost shouldn’t be the only factor that influences whether you get a policy. One of the less obvious benefits of insurance policies is coverage of personal property.
When you file a claim for damage to your home, the insurance company may pay to fix the damage to the structure, as well as the replacement of personal items. However, you may need to enhance the policy with a “policy rider” to insure valuable items like electronics and fine jewelry.
Another benefit of homeowners insurance is that the policy offers personal liability coverage when someone is injured on your property and sues for the cost of their medical expenses. Your policy may also protect the personal possessions of guests when their items are damaged at your home. Liability protection helps you avoid losing your home in the event of a lawsuit. Your policy protects both you and your mortgage company.
Homeowners Insurance FAQ
At what point do homeowners need a policy?
If your bank requires a home insurance policy, the best time to talk to an agent is before you close on your home. You may need to have a home policy in order to close on the home. Even if you don’t expect to close on your home for several weeks, you should still start exploring policies early to find the best rate and to determine how much homeowners insurance is needed.
Sometimes, a lender requires that homeowners have a policy before they can complete the home loan underwriting process. A delay in getting homeowners insurance could lead to a delay in closing or having the entire closing process fall apart because the buyer doesn’t have enough coverage.
If the closing fails because of another reason and you already have coverage, you can cancel the policy. Most major companies will reimburse you for any portion of the annual premium that wasn’t used, so you shouldn’t experience any significant financial penalty for cancellation.
What happens if you don’t have a policy?
Unfortunately, insurance companies can cancel a homeowner’s policy for a variety of reasons. If homeowners fail to make on-time payments, have poor credit, or have a suspicious or frequent claim history, they may cancel or not renew the policy. Policy renewals occur each year and the insurance company will contact you if they decide to cancel.
When your policy is canceled, mortgage lenders may obtain a policy on your behalf, which is known as force-placed insurance or lender-placed insurance. Unfortunately, lender-selected homeowners insurance policies usually cost more than the policies you can find on your own, so it’s essential to retain your policy and avoid cancellation.
Can homeowners shop around for a new homeowners insurance policy?
Car insurance, life insurance, and homeowners insurance costs vary with each provider, and you may find it financially prudent to shop around every so often. Homeowner’s insurance premiums usually increase after you make a claim, but your company can also increase your premiums for any reason at any time, no matter how much coverage you have.
If your insurance company notifies you of a rate increase, you may want to shop around for current prices with a different home insurance company. When you find better insurance rates on a new policy, make sure that you don’t cancel your current policy before your new policy is in place, so you remain financially protected and in good standing with your lender should an accident happen.
Explore home insurance before you buy
If you have questions about insurance policies or home insurance rates, the best time to explore more coverage options is before you finance a house. It’s safe to assume that if you buy a house with a loan, your bank or lender will require that you get a policy. You may find helpful information from other resources like the Insurance Information Institute. Call an insurance agent to discuss your options early in your home search so you have all the information you need when it’s time to get an insurance policy.
