Do You Really Need Homeowners Insurance?
When one gets a driver's license, one is required to purchase automobile insurance. Does it follow that if one buys a home, one is required to buy homeowners insurance? The answer is technically not, but probably so.
Need for Mortgage Investment Protection
One can legally own a home without insurance, but if a mortgage is involved, lenders will most likely insist upon insurance to protect their investment. Since homeowners insurance does not cover earthquakes or floods, the lender might also require that the buyer purchase insurance for these contingencies as well.
Condos and Townhouses
If the purchase is a condominium or townhouse, the board of directors of the association may require homeowners insurance that includes coverage for earthquakes and floods.
After the Mortgage is Paid Off
There is no law requiring homeowners insurance, so technically, one could stop paying homeowners insurance when the mortgage is paid off. However, a home that is fully paid for is quite an investment, and it is inadvisable to cancel the insurance and risk losing everything.
How Much Coverage is Needed?
Homeowners insurance should cover the following:
- Physical structure
- Personal belongings
- Expense of living elsewhere while repairs are being made
- Liability related to others on and off property.
The insurance should cover the cost of rebuilding and replacement costs at current prices. Some mortgage lenders require that the mortgage be insured, protecting against losses on their investment (the buyer's home). Safeguards against inflation are also recommended. In addition, coverage to meet the requirements of updated building codes should also be included.
Insuring Older Homes
Insuring older homes can be problematic, so it is important to make certain that the policy will cover replacement and repair costs of the older home to an acceptable level. Some insurance companies will not insure older homes, so it is a good idea to do some research to determine how to handle such a situation.
Personal Belongings
In order to recoup the standard 50% to 70% of the value of one's personal possessions, it is important to do a home inventory—a list of possessions, including:
- Photographs
- Receipts
- An approximate value of major items.
Insurance agents can provide information about such inventories, and can also provide additional coverage if needed.
Disaster-Related Living Expenses
Should the policyholder be forced to live elsewhere while the property is being repaired or rebuilt, the typical amount of reimbursement is 20% of the total insurance policy. If the property is a rental, the uncollected rent can also be reimbursed under the conditions of the policy.
Personal Liability
Lawsuits abound; therefore it is very important to be insured against suits, as a result of injuries incurred by others on one's property, or for damage to the property of others. It is recommended that one be insured from $300,000 to $500,000 at least, which includes expensive legal costs.
The Bottom Line
While homeowners insurance is not legally required, there are a myriad of reasons why homeowners insurance is indubitably a good idea for protection and peace of mind.