Buying Basics - What Types of Insurance Will I Need.
You may be surprised to learn that a homeowner is not the only person or entity that can have a claim on the property. Depending on the situation, governmental bodies, contractors, lenders, judgment creditors and the Internal Revenue Service may also have claims to the property. Occasionally the homeowner is not even aware of these claims.
Before buying a piece of real estate, a complete investigation of the property is done, including a title inspection. A title search can be complicated. It involves a thorough examination of records covering all recorded judgments, street and sewer assessments, taxes and anything else that may relate to assuring proper ownership of the property in question.
Usually all claims on the property are uncovered during this process. However, sometimes factors such as deeds surfacing that predate public record, clerical errors or misrepresentation from previous owners can prevent claims on the property from being revealed during this process.
A title insurance policy provides the homeowner with coverage against these situations.
An example: A new homeowner purchases a property, not knowing that a contractor has recently refurbished the kitchen. This contractor was not paid by the previous owners and now has a valid claim on the property. They may file a lien on the property holder, the new homeowners.
This lien was not in the public record at the time the title search was completed. Nevertheless, the contractor's claim is valid, and they cannot be denied their interest in the property unless their claim has been settled or released.
The new homeowner is responsible for this claim, despite having no active knowledge of it. Title insurance provides protection against just such an occurrence.
Title insurance will pay for defending the policyholder against any lawsuits challenging their title. They will either clear up the title problems or pay for any losses the titleholder incurs.
Purchasing owner's title insurance is not mandatory, but it is a good idea. A one-time premium covers the policy, which provides protection throughout the time period a policyholder holds the title.
While a mortgage lender does require lender's title insurance, this only provides protection against their interest. It does not apply to any monies the homeowner has invested, such as a down payment. For this reason, purchasing title insurance is just good protection for any homeowner.
People sometimes acquaint insurance with throwing away good money on something that probably isn't going to happen. While it is tempting to think of insurance this way, it is neither accurate nor sensible.
First, when you buy a new home, just about every lender in the free world will require you to purchase homeowner's insurance. That's easy enough. Reason number one to have insurance: you have no choice.
Insurance just makes good sense. If you are like most American homeowners, your home is one of your most valuable assets. Even if it isn't, it's still worth a significant amount of money. Something this important should be protected.
There are three things homeowner’s insurance is designed to cover, namely your home, your personal property and liability.
Your home: If your home should be damaged or destroyed (which is most frequently due to fire), the cost of rebuilding can be very expensive. That is, of course, unless someone else pays for it.
The cost to rebuild your home should be based on the square footage of your dwelling space. Your coverage amount should not be based on the amount you paid for the home or the amount of your mortgage. Ask your insurance agent about a policy that includes a guaranteed replacement cost provision. This will ensure that the insurance company will rebuild your home, even if the cost of construction has gone up and is more than the policy coverage. Each insurance company defines guaranteed replacement cost provision differently, so make sure that your insurance agent explains their definition clearly.
It is important to note that these policies usually do not cover rising water (flood) or earth movements (earthquake) which are additional types of insurance that may be required, depending on your location. See below for description of those policies.
Your property: This insurance will cover up to a specific amount towards the replacement of your personal items in the home. It is similar to the insurance that you would carry if you were renting. Some insurance companies also offer personal property replacement guarantees, which pay for the actual cost of the item today. Ask your agent which items are not covered under your policy. An expensive piece of jewelry may not be covered; however you can purchase a separate policy for it.
Liability: This insurance is intended to protect you in the event that someone is injured on your property. Frequently this is something that can't be predicted. Someone may slip on an ice patch on your driveway. Someone else may fall down your staircase. As the property owner, you are the responsible party in the event of a lawsuit.
A good rule of thumb is to carry coverage that equals twice as much as your assets. If your assets are valued at over a few hundred thousand dollars, you may want to consider an umbrella policy, also known as excess liability. This increases the liability coverage on your home and car (if applicable). Umbrella policies are typically sold in increments of $1 million
Important Note: To keep the cost of your insurance premiums down, consider purchasing policies with the highest deductible you think you can afford.
In addition to the homeowner's insurance outlined above, there are a number of additional types of coverage available to protect homeowners. Some of the more common types are outlined below. You may be required to carry one or more of these policies as well. Speak with your Loan Officer and/or Insurance Agent for more detailed information as to what you required to carry, as well as what coverage would be in your best interests.
PMI (Private Mortgage Insurance)
This insurance protects the lender if the homebuyer should default on their loan. It is usually required on loans if the down payment is less than 20% of the purchase price of the home. After the equity in your property increases to the 20% mark, you do not need PMI. You may talk to your servicing lender about removing it at that time.
Mortgage Life Insurance
This type of policy guarantees that your lender will receive their money in the event of your death. Your insurance agent and financial planner will be able to tell you about the different types of insurance that would best fit your needs.
Flood insurance is required only when a home sits in a federally designated flood area. It is not required if the home sits outside of the flood area. Your standard homeowner's insurance policy most likely does not cover rising water. Rising water can come from a river, a street or a torrential downpour. Flood insurance is inexpensive when your home is not located in a designated flood area.
If your home is located in an area where earthquakes are a risk, you will need to purchase earthquake coverage. Earthquake insurance policies pay to rebuild or repair your home if it is damaged by an earthquake, hence the name. Remember, your homeowner's insurance policy does not cover earth movement.
You may be wondering why you need fire insurance if your homeowner's policy already covers the cost of rebuilding. Usually you don't, but in some places fire insurance is not covered by your city taxes. In other words, this policy is designed to cover the cost of extinguishing a fire in your home, such as fire trucks, equipment, firemen and so forth. Homes not located in a fire district can usually be covered with this separate fire insurance policy.
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