Compared to renting, owning a home can be a great thing. You can paint whatever colors you want (unless your homeowners association says otherwise) and you get to decide what the landscaping looks like.
Yet owning a piece of property worth hundreds of thousands of dollars is a big financial risk, too. That’s why you need to insure what is likely to be your most valuable possession. For example, if you have a mortgage on your property, your lender wants to know that if something happens to the house that they’ll be reimbursed. But your insurance needs don’t stop there.
Six Types of Insurance Homeowners Should Have
Here are six different insurance types that you’ll want to have if you are a homeowner.
You won’t be able to buy a home using a mortgage company without homeowners insurance. It’s funny it is called homeowners insurance because as long as you have a mortgage it is really insurance for the mortgage firm that lent you thousands of dollars to buy your home.
Homeowners insurance will replace your home in the event it is damaged or destroyed. It also insures your ability to then pay off your home mortgage on the destroyed property in order to get a new mortgage to rebuild. Most people get their homeowners insurance policy when they buy their home, but it’s also a good idea to shop around every couple years to make sure you are still getting good rates.
When you purchase a property you want to make sure you are buying it with a free and clear title. A clear title means that there are no liens on the property that could result in your ownership being null and void. For example, if you go to buy a home and there is a lien on it for unpaid taxes then the home could be sold to pay off the tax lien despite you having purchased it.
This is another type of insurance you must have in order to buy a property using a mortgage. A bank won’t lend you money without insurance that guarantees that you (and subsequently the bank) will have true ownership of the home. You usually pay this at the time of purchase and it covers your property for the duration of time you own it. Keep in mind you may need to get title insurance again if you refinance your mortgage. Rates can also vary, so be sure to call around before using the company recommended by your real estate agent.
Liability and Umbrella Insurance
Owning a piece of property makes you liable for injuries that occur on the property. Sometimes that liability is legitimate and other times a lawyer is just looking to score a big win on an unsuspecting homeowner.
Your homeowners insurance comes with liability insurance built into it, but that might not cover you in case of serious liability. For example if you own a pool that isn’t fenced in and someone falls in, breaks their neck, and is paralyzed for life you could be on the losing end of a multi-million dollar settlement. Your homeowners insurance might only cover $500,000 of the liability leaving you completely exposed for the remaining amount.
That’s where an umbrella policy comes in to play. Whether through a car accident or accident at your home, an umbrella policy covers all of your other policies to act as secondary coverage. If you had a $2 million umbrella policy in the above case then your homeowners insurance would pay the first $500,000 and the umbrella policy would kick in to cover your liability up to the coverage amount.
Natural Disaster Insurance
Your homeowners insurance policy covers “normal” circumstances where your home might be damaged or destroyed like theft, fire, and so on. But there are exclusions in most policies for certain types of natural disasters especially if you live in an area with a consistent type of natural disaster.
Flood Insurance. If you live in a flood plain you’ll need flood insurance. However, even if you don’t live in a designated flood area you may need flood insurance. An insurer could possibly deny a claim when your home is flooded—even if that flood was caused by a normally covered event like a thunderstorm. Check out the National Flood Insurance Program if you live in an area with high flood insurance rates.
Earthquake Insurance. Likewise if you live in an earthquake prone area then you might need coverage to protect the structure in the event of an earthquake. Your home insurance company should be able to tell you whether or not earthquake protection is necessary.
Hurricane Insurance. Lastly, for those that live near the coasts (especially Florida) hurricane insurance is almost certainly a requirement. If your home is flooded, damaged, or destroyed due to the winds and rain from a hurricane and you don’t have coverage your regular homeowners insurance policy will not cover you.
Mortgage Insurance or PMI
Mortgage insurance or PMI (private mortgage insurance) is required if you cannot put a 20% down payment on the home and you don’t want to get a 2nd mortgage to cover what you lack. This insurance protects against your defaulting on the home mortgage.
The bank is essentially acknowledging they are taking a bit of a risk by letting you buy a home with less than a 20% down payment. Of course, to accept this risk they need you to buy some insurance to protect against your own ability to pay off the loan.
PMI is no longer required once you get to 20% equity. That can be achieved by paying extra on your mortgage or through the home’s value going up. Your bank won’t remind you that you can cancel PMI once you hit 20%, so make sure you remember to check the value of your home and continue to pay down the mortgage.