Do You Need To Have Homeowners Insurance?

You can own just about anything without having it insured as long as you own it free of any debt. The bottom line is that if you have a mortgage on your home, the lender will require insurance. Insurance is designed to protect the owner of property in the event that the property is damaged or destroyed. It is also meant to protect any other people or entities that may have a financial interest in the property such as a mortgage company. If you own real estate that has a loan it, lenders will require that insurance be carried.

"Real Property" is the name for land and things permanently attached to it such as houses and buildings. If you take out a mortgage on a property, the mortgage company has a financial interest in the property. The buildings and the land act as "collateral" which is a term that means a security or guarantee, which is pledged by the borrower for the repayment of a loan if he cannot repay. If your home is damaged, its value is reduced. When this happens the home can no longer act as a protection for the bank. For example, if you were to borrow $100,000 to buy a $100,000 house, the home acts as collateral for the full amount of the loan. If the house sustains damage by fire that costs $50,000 to repair, you are obligated under a loan contract to make sure those repairs are made. If you do not make the repairs, the bank now has only your word that you will repay the loan in full. If you default on the loan and the bank forecloses and takes possession of the property, they will now own a property that is worth less than they have essentially paid for.

Another required insurance that many people are not aware of is flood insurance. If you own a home with a mortgage on it the lender may require that you purchase flood insurance if you live in a Federally designated flood zone. This is because private insurers are very resistant to accepting the risk associated with flooding. When floods occur, the damages are often vast and very expensive. For this reason commercial insurance companies have typically excluded flood on their policies. In 1973, the U.S. Congress enacted the Flood Disaster Protection Act, which made flood insurance mandatory for anyone who owns a home located in a flood zone as long as the home had a mortgage. Flood insurance is optional for those who do not have a mortgage on their property.

Flood insurance is subsidized by the federal government. It is not available to everyone, and if you do not live in a flood zone, flood insurance is not available to you.

Homeowner's policies often contain a provision relating to sump pump backup. If your home has a basement, it is susceptible to damage by flooding, because it is below grade. Insurance companies often offer coverage specifically for the backup of this type of sump pump system. This is different than flood insurance however even though water in the basement is often viewed as a flood related insurance claim.

An obvious question regarding the need for insurance is that if it is only required by a mortgage company when the mortgage is involved, should you carry insurance if there is no mortgage. The answer to this is dependent on the value of the property, your net worth, and your ability to absorb a financial loss in the event of damage. If you have enough cash in the bank to replace your house entirely in the event of damage, you may opt to self-insure the property. The location of your home, its value, and the rates that would apply to a protective insurance policy are all factors to consider. In almost every case, it makes economic sense to spring for the cost of an insurance policy to protect the home because the cash investment of the insurance premiums would be far less than the risk of losing a substantial savings to rebuild.

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