Understand different types of insurance polices
Unforeseen financial crisis or natural disasters can happen to anyone, at any place, and anytime. It surely can leave a significant impact in every aspect of our lives, physically, emotionally, and financially. Especially, if you are a homeowner, you want to be sure that your property is protected so you still have a place to stay. In order to do so, it is very helpful if you know these following types of most common insurances.
Hazard Insurance
A hazard insurance is not same as a homeowners insurance policy. Hazard insurance is a section of a homeowners insurance policy. Hazard insurance generally refers to coverage for any structural damage done to your home. Homeowners insurance encompasses a broader range of policies, such as compensation for theft and financial protection if you have to move out to cover home repairs. Mortgage lenders typically require you to have a minimum amount of hazard insurance in place if you’re getting a loan to buy a house.
The insurance premiums may be escrowed in with your mortgage payment. If they’re not and you allow your coverage to lapse, your lender could purchase a homeowners insurance policy on your behalf (called force-placed insurance) and pass the cost on to you.
You should discuss with your insurance carrier or insurance agent for more details of which items are covered by your policy.
Private Mortgage Insurance (PMI)
Private Mortgage Insurance or PMI is a policy that protects the lender against any losses if you stop making payments or fail to repay you loan. PMI is required when you have a conventional loan with a down payment of less than 20% of the home’s purchase price. This also applies to conventional refinance loans with less than 20% of the home equity. There are several different ways to pay for PMI with either a monthly premium, a one-time up-front premium paid at closing which is non-refundable if you decide to sell your property or to refinance, or split-premium that you pay a larger upfront fee that covers part of the cost to then shrink your monthly payment obligations. There are also several ways to remove PMI from a mortgage, such as pay down your principal balance, or gain enough equity through market increases or home improvements. By law, lenders must terminate PMI on the date your mortgage loan balance reduces to 78% of the home’s original value or purchase price. You should discuss with your lenders whether having a PMI or getting a piggyback HELOC loan for 20% of the down payment will save your monthly payment and/or closing costs.
Flood Insurance
A flood insurance policy covers your house and your belongings for flood-related damage. The majority of homeowners who buy flood insurance buy it from the National Flood Insurance Program. It covers problems such as storm surges, inland flooding (rivers and streams overflowing during a storm), and flash floods. Flood insurance through the NFIP has a 30-day waiting period before coverage goes into effect, meaning you can’t make a flood insurance claim for damage that occurred during the waiting period. Some private flood insurance companies have a shorter or no waiting period. Flood insurance can generally be broken into two main parts: Dwelling (your house) and contents (your belongings). You may be able to purchase a building-only policy, a contents-only policy or both, depending on where you purchase your flood insurance from. you may be required to have flood insurance if your property is in a high-risk flood area.
Earthquake Insurance
Earthquake insurance offers coverage for your home and belongings if they are damaged or destroyed in an earthquake. A standard homeowners insurance doesn’t cover earthquake damage, one exception is if an earthquake sparks a fire that burns your house, in that case, your home insurance policy should cover the fire-related damage since the policy covers fires. Earthquake insurance isn’t mandatory. The exact coverage may vary from policy to policy, but earthquake insurance generally includes repairs to your home and attached structures, damaged belongings, additional living expenses, detached structures, debris removal, emergency repairs, and building code upgrades. Your insurer usually sets the same limits on dwelling coverage for both earthquake and home insurance. This reflects the estimated cost to rebuild your home — not its market value. Earthquake deductibles tend to be a percentage of your coverage limits. These percentages may range from 2.5% to 25%, depending on your insurer.
Title Insurance
Title insurance is a type of insurance that protects mortgage lenders and/or homeowners against claims questioning the legal ownership of a home or property (i.e., the title to the property). If disputes over title ownership arise after the purchase, the insurance policy pays for any legal fees to resolve them. Title insurance is designed to protect the policyholder from any past title discrepancies from the seller or previous owner that might be uncovered during or after the purchasing process. Title insurance covers any underlying issues with a home or property’s title that the title company may have missed during the home-buying process. In any real estate transaction, the title company runs a public records search to ensure that the home being purchased is free and clear of any liens or ownership disputes. This process confirms the seller’s legal right to sell the home. There are two types of title insurance: lender’s title insurance and owner’s title insurance (also called buyer’s title insurance). They both provide the same kind of protection but cover different parties who have financial stakes in a property. In most cases, buyers are not required to have their own policies. Still, if you want to protect yourself from potential legal costs in the future, you may choose to get a title insurance policy.
Mortgage Protection Insurance (MPI)
Mortgage protection insurance can be an attractive option for homeowners looking to protect their investment and keep family members from financial troubles. This type of insurance policy covers your remaining home loan balance if you die. If you have this policy, the insurance company will typically pay the lender the remaining mortgage balance after your death. Some MPI policies will also pay out to the lender for a specific period of time if you become unemployed or disabled, so there is no interruption of payments. While MPI can be beneficial to you and your loved ones, there are also downsides to consider before getting a policy, such as the premium doesn't change as you make your mortgage payments and pay down the principal, but the death benefit declines as your loan balance decreases. If you can't afford another expense, the cost of MPI may be too stressful. Unlike some insurance products that are required when you buy a home, MPI is optional.