Guide to Hazard Insurance for Homeowners
When you take out a home loan, the mortgage lender will require that you have hazard insurance. This isn’t the same thing as mortgage insurance. Hazard insurance protects you, while also protecting the lender’s interest in your home.
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Keep reading to learn how hazard insurance works and what you have to do to get it.
Why is Hazard Insurance Important?
Hazard insurance protects you should something happen to the home. If there is a fire, storm damage, or theft, your hazard insurance will help you pay for the damages and to rebuild your home. Basic hazard insurance typically covers these perils, but always check with your insurance agent and read the fine print on your policy to make sure.
Keep in mind that hazard insurance only covers the structure of your home. Lenders require this in order to protect their collateral. If your house burned down and you didn’t have hazard insurance, chances are you wouldn’t be able to rebuild it. This would leave you without a home and the lender without any collateral to sell to get the money back that they lent you.
What Hazard Insurance Doesn’t Cover
As we mentioned above, hazard insurance only covers ‘hazards.’ But it only covers certain hazards. The most commonly excluded hazards include earthquake damage and flood damage. If you live in a high-risk area for either of these issues, you may need a separate policy for coverage. In fact, your lender may require that you have coverage for these issues, again in order to protect their collateral.
Hazard insurance also doesn’t cover liabilities. Liabilities are different than coverage for damage to your home’s structure. Liabilities include things like:
- Damage to another person’s’ property
- Someone hurting themselves on your property
- Damage to your personal belongings
Your lender doesn’t care as much about these issues because they don’t affect the structure of the home. If someone gets hurt on your property and sues you, it may be difficult to pay your mortgage, but your house isn’t going to burn down as a result. The lender could foreclose on your home and then sell it, recouping the money that they lent you.
You can add coverage for these types of issues on your hazard insurance policy, though. Talking with your insurance agent can help you determine which coverage is best for you.
How Much Does Hazard Insurance Cost?
The typical homeowner’s insurance policy costs an average homeowner around $1,000 per year. This can vary based on your coverage and your location, though. You should shop around and get quotes from several lenders in order to determine the most affordable policy with the best coverage.
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The factors that determine your overall cost include:
- The value of the property
- The amount of dwelling coverage you need
- The amount of liability coverage you need
- The additional riders you require, such as flood insurance or personal property riders
- Your homeowner’s insurance claim history
- Your credit
Insurance agents take a risk insuring your home. They base your premiums on your likelihood of filing a claim. The more likely you are to file a claim, the higher the premiums you will likely pay. If you are unlikely to file a claim based on the insurance company’s evaluation, then you may pay lower premiums than someone that is high-risk.
How Long do You Need Hazard Insurance?
Technically, you should have hazard insurance as long as you own the home. However, you are only required to have it as long as you have a mortgage on the property. Don’t assume that your mortgage company won’t know if you don’t have hazard insurance after you close on the home. They check each policy to make sure there is adequate insurance in place every year.
The mortgage company knows that you have insurance for the first year because they require a paid receipt and Declarations Page for the first year of coverage. After that, you must provide proof of your paid insurance on a yearly basis unless you have an escrow account with the mortgage company. If you do have an escrow account, the mortgage company pays your premiums for you and they know you have insurance.
If you don’t have insurance, the mortgage company will force place a policy on you. They will only provide insurance to cover their interest in your property (hazard insurance) and it will likely cost as much as double or triple the premiums you could have gotten with your own policy.
Hazard insurance protects you and the lender, so it’s an important expense. Even though it can add as much as $1,000 annually to your expenses as a homeowner, it protects you in the unfortunate event that something happens to your home.
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