Home Insurance: Who's Covered?

Home insurance is not a legal requirement, but it is highly recommended and usually a prerequisite for getting a mortgage. Home insurance provides financial protection from unexpected losses, including fire and wind damage, as well as liability concerns like dog bites or slip-and-fall accidents. It also covers the cost of rebuilding your home and replacing damaged items. While not mandatory, it is a valuable safety net for homeowners, protecting their most valuable asset and providing peace of mind.

Home insurance isn't required by law, but mortgage lenders may demand it

Home insurance is not a legal requirement, but mortgage lenders will usually demand it. This is because, when you take out a mortgage, your house is used as collateral for the loan. This means that if you can’t pay your loan back, the lender can recover its money by taking possession of your house. Home insurance protects the lender’s investment by ensuring your home can be repaired or rebuilt if it's damaged as a result of events covered by the policy. If you don’t have home insurance and your home is destroyed, the lender may not be able to recover the money it lent you.

Lenders will typically require you to have enough insurance to cover the full cost of rebuilding your home if it's destroyed. This is known as the replacement cost. So, if it costs $300,000 to rebuild your home, your lender will likely require you to have at least $300,000 in dwelling coverage.

If you don't get home insurance before your loan closes, or you don’t get enough coverage, your lender may buy it for you. This is known as "force-placed insurance", and it’s usually more expensive and offers less coverage than insurance you buy on your own.

Depending on your location, your lender may require you to purchase extra coverage beyond a standard home insurance policy. For example, you may need flood insurance if you live in a special flood hazard area (SFHA).

Home insurance protects your house and belongings

Home insurance is not required by law, but it is highly recommended. It is designed to protect your house and belongings from damage or theft. It also covers you in the event of a lawsuit and provides peace of mind.

Home insurance covers the cost of rebuilding your home and replacing your belongings if they are damaged by a covered event. For example, if there is a fire or windstorm, home insurance can save you hundreds of thousands (or even millions) in out-of-pocket expenses. It also protects your belongings, including valuables such as jewellery, art, and electronics, in the event of theft, damage, or loss. This protection extends beyond your home, covering items like your laptop, bike, or phone even if they are outside your house.

In addition to protecting your house and belongings, home insurance also provides personal liability coverage. This means that if someone is injured on your property, your insurance will cover their medical expenses and protect you from lawsuits and damages. This coverage also extends to damage caused by your pets.

Home insurance also covers additional living expenses if you need to temporarily relocate while your home is being repaired after a covered loss. This includes hotel costs and meals.

While home insurance is not legally required, most mortgage lenders will require some form of it to protect their investment. They may even purchase insurance for you if you don't, which is usually more expensive and offers less coverage.

It also covers liability if you hurt someone or damage their property

Home insurance is not a legal requirement, but it is highly recommended. It is also usually required by your lender if you have a mortgage.

Home insurance covers the cost of rebuilding your home and replacing items damaged by covered events. It also covers liability if you hurt someone or damage their property. This is known as personal liability coverage.

Personal liability coverage may pay for injuries sustained by others on your property, up to your policy's limits. For example, if a child runs onto your property to pet your dog, and the dog is startled and bites the child, personal liability coverage may help cover the cost of medical bills. It may also cover legal fees if you are sued for the cost of medical bills and other injury-related costs, including attorney and court fees.

Personal liability coverage may also cover you if someone is injured on your property due to negligence. For example, if there is snow and ice on your walkways, or a loose handrail, and someone falls and is injured, personal liability coverage may cover the cost of any medical treatment they require.

In addition, personal liability coverage may cover you if your dog bites someone, depending on the breed of dog and your policy restrictions. It is important to check with your insurer to find out if you have coverage and if a sublimit applies.

It can be purchased through an escrow account as part of monthly mortgage payments

Home insurance is not required by law, but it is highly recommended. Unexpected events like fires, theft, and natural disasters can happen at any time, and home insurance can help cover the costs of rebuilding your home and replacing damaged items. Most mortgage lenders will require some form of home insurance to protect their investment.

An escrow account is a convenient way to manage property taxes and insurance premiums for your home. It is funded each month as part of your total monthly mortgage payment. Lenders use it to make property tax and insurance payments on your behalf. Here's how it works:

When you make your monthly mortgage payment, a portion of it goes towards your mortgage principal and interest. The remaining part goes into your escrow account to cover property taxes and insurance premiums, such as homeowners insurance, mortgage insurance, or flood insurance. This way, you don't have to worry about saving separately for these expenses or remembering to make payments on time.

When your taxes and insurance payments are due, the funds are withdrawn from your escrow account to cover these bills. Lenders will typically require escrow accounts to have a minimum balance of up to two months' worth of escrow payments to ensure that there is enough money to cover these expenses.

Escrow accounts are especially useful during the home-buying process. They protect the buyer's good faith deposit and ensure that the money goes to the right party according to the conditions of the sale. The deposit will be held in the escrow account until the transaction closes, providing peace of mind for both the buyer and the seller.

In summary, while home insurance is not legally required, it is strongly recommended and often required by mortgage lenders. Escrow accounts offer a convenient way to manage property taxes and insurance premiums associated with homeownership, ensuring that these important bills are paid on time and removing the burden of lump-sum payments.

Lenders can force borrowers to carry insurance to cover the mortgage amount

Home insurance is not a legal requirement. However, if you have a mortgage, your lender will usually require you to have a basic form of home insurance. This is because your house is used as collateral for the loan. In the event that you are unable to pay back your loan, the lender can take possession of your house. Home insurance protects the lender's investment by ensuring that the house can be repaired or rebuilt if it is damaged by events covered by the policy.

If you do not have home insurance and your house is destroyed, the lender may not be able to recover the money they lent you. Therefore, lenders can force borrowers to carry insurance to cover the mortgage amount. This is known as "force-placed insurance" or "lender-placed insurance". Force-placed insurance is usually more expensive than finding an insurance policy yourself, as it tends to be costly due to the uncertainty about what might happen to the home if the borrower isn't keeping up with the bills.

Mortgage insurance is a separate type of insurance that protects the lender if you stop making payments and default on your mortgage. There are two types of mortgage insurance: private mortgage insurance (PMI) and government mortgage insurance, such as for Federal Housing Administration (FHA) loans. PMI costs between 0.3% and 1.5% of your loan amount per year, while government mortgage insurance costs around 0.55% of your loan amount each year.

In addition to home insurance and mortgage insurance, your lender may also require you to purchase extra coverage, depending on your location. For example, if you live in an area prone to flooding or earthquakes, you may need to add on flood or earthquake coverage.

Frequently asked questions