If you're buying a home, one question you might wonder is this: Is home insurance required when you own a house?
In many cases, homeowners insurance is indeed mandatory—and even in cases where it isn't absolutely necessary, it's still a good idea. To help you understand why, we've put together this Home Buyer's Guide to Home Insurance, which will help walk you through what you need to know from beginning to end.
In this first article, we'll introduce you to what homeowners insurance is, why it's often essential, and what can go wrong if you don't have it.
What is homeowners insurance?
With home insurance, as with other types of coverage (including health insurance), you pay a relatively small amount of money either monthly or annually in exchange for the promise that your provider will help you pay for unexpected costs you might incur as a homeowner.
What can go wrong? So much, including natural disasters, fires, crimes, accidents, and other emergencies, many of which can be expensive to fix. Without home insurance, you run the risk of getting stuck with a bill that could be in the tens of thousands of dollars. Home insurance offers protection and peace of mind that you won't get hit with expenses that might be hard to pay on your own.
Why you need home insurance with a mortgage
If you need a mortgage on your home, most lenders will require you to get home insurance before they approve your loan and close the deal.
The reason: By loaning you money for the house, lenders are also investing in your property. If this investment suddenly plummets in value—since, say, a tornado turned it into a pile of rubble—it's in your lender's interests for you to have a home insurance plan that will rebuild and restore what you (and your lender) have lost.
"Homeowners insurance is typically required by a mortgage company," says Brian Rubenstein, senior director for Ally Home. "A lender wants to protect the financial investment they made in your home."
When to get homeowners insurance
At closing, most mortgage lenders will need you to show proof that you have an insurance policy already in place—even though you don't officially own the home yet! This proof is known as an insurance binder, and serves as a temporary agreement between you and the insurance company that becomes permanent once you officially close on the home.
In fact, most lenders will want to see an insurance binder at least a few days before closing. As such, you'll want to start shopping for insurance a few weeks before your closing date, so you have time to compare policies and find the right insurance company for you.
Do you need homeowners insurance without a mortgage?
Now, what if you don't have a mortgage? Technically speaking, no, you're not required to have homeowners insurance. But then the question becomes "Should you pay for home insurance?" The answer is still a resounding yes.
"Even if you don’t have a mortgage, home insurance protects the investment you’ve made in your house," says Amy Danise, chief insurance analyst at Forbes Advisor.
"Think of the worst-case scenario, because that’s really what insurance is for: If your house burned down or was destroyed by a tornado, would you suffer financially?"
Reasons to get home insurance: What home insurance covers
If you don’t have homeowners insurance, you could be in for a rude awakening if disaster strikes and you need to pay engineers, contractors, electricians, masons, painters, roofers, and other highly specialized (read: expensive) professionals to repair the damage to your house.
According to the Insurance Information Institute, about 1 in 20 insured homes will file a claim each year. Meanwhile, data from the Insurance Research Council finds that, on average, insurance companies pay out about $8,787 per claim to help defray homeowners' costs. Below are some of the most common and expensive insurance claims homeowners experience.
- Wind and hail: Wind and hail damage is the most frequent reason why homeowners file insurance claims. Every year, 1 in 40 insured homeowners files claims related to wind and hail, with claims paying out an average of $11,200.
- House fire or lightning strikes: Every year, about 1 in 350 insured homeowners files claims due to fire or lightning. These accidents are also among the most costly to repair, with claim payments averaging $11,971. Furthermore, lightning strikes are becoming more expensive. Why? Because our homes are rigged with an increasing number of electronic systems like smart home technologies, which can go haywire when struck by lightning.
- Water damage or freezing water: About 1 in 50 insured homeowners files a property damage claim caused by water damage (like a leaky roof) or freezing water (burst pipes) each year. The claim payments average $10,849.
- Theft: About 1 in 400 insured homeowners files claims due to theft every year, with claims paying an average of $4,391.
- Personal injuries damage: In addition to covering your home and belongings, home insurance often includes liability coverage. This means that if a visitor gets hurt on your property, her medical bills should be covered by your home insurance company. About 1 in 900 insured homeowners files claims related to bodily injury every year. This injury could happen inside your home or, in some cases, elsewhere. For instance, if your dog bites someone on your property or even on the street or down the block, that is typically covered by your home insurance. The reason: Although we all know that dogs are members of our family, pets are considered property in legal terms. As such, any damage they inflict on others is often covered by insurance, wherever the incident happens. And good thing, too, since the average claim to cover the injured party's medical bills hovers around $45,000.
All that said, what exactly is covered under a home insurance policy—and what you'll pay for it—varies by provider. As such, it's important to shop around and understand your options.
So how much does home insurance cost, and how much do you need? We'll cover that in future installments of this guide. Stay tuned!
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