Buying a Home: Get Properly Insured

When you are on the hook for something as expensive as a home – not to mention when it’s your residence – you’ll want to make sure you have reliable protection against anything that might substantially damage it. A hailstorm could damage your roof, faulty wiring could burn your house down or a pipe could burst and ruin all your carpet and some of your furniture.

To guard against worst-case scenarios, you’ll want to purchase homeowners insurance (also known as hazard insurance). In fact, if you have a mortgage, the lender will require you to purchase hazard insurance until the loan is paid off. But really, you’d want to have this coverage anyway.

Uninsurable Homes

In some cases, a home may be uninsurable. For example, if a previous homeowner filed a large claim for mold or water damage, insurance companies may see the home as too great a risk and refuse to write insurance on it. If this turns out to be the case, you should be able to get out of your purchase contract unharmed.

Umbrella Policies

Homeowners insurance also protects you if someone gets injured while on your property and tries to sue you, but if you want maximum protection against lawsuits, you should purchase an umbrella policy. Once you have a home, you have more to lose if someone sues you – they can try to get your house taken away to help raise money for you to pay their damages. An umbrella policy picks up where the liability protection of your homeowners insurance and auto insurance leave off and can offer you coverage up to $1 million or more. (To learn more, read 10 Insurance Tips for Homeowners and It’s Raining Lawsuits: Do You Need an Umbrella Policy?)

If the hazard report reveals that your home is in any sort of special hazard area, your lender may require you to purchase additional insurance. For example, if your home is in a special flood hazard area, you’ll have to buy flood insurance. You’ll also have to pay for this extra hazard insurance until your mortgage is paid off, unless you can find a way to get your home removed from the special hazard area (which is sometimes possible but definitely not something you should count on).

Life Insurance

If you’re buying the home with others who will depend on your income to get the mortgage paid each month, such as a spouse and/or kids, now is the time to purchase life insurance, if you haven’t already. If you were to die unexpectedly, you wouldn’t want your family to lose their home, especially at the same time as they were mourning your death.

At the very least, buy a policy that will allow them to keep paying the mortgage for long enough to find a roommate or sell the house. If you can afford it, you might want to get a policy large enough to allow your family to pay off the house completely so the long-term loss of your income won’t affect them too dramatically. (To learn more, read How Much Life Insurance Should You Carry?)

You should also consider disability insurance, which pays you monthly if you are injured so badly that you can no longer work. Social Security provides some coverage in this situation, too, but it’s not as much coverage or as good coverage as you can purchase privately. (See The Disability Insurance Policy: Now in English.)

Setting Up Your Insurance

You’ll need to line up all of the lender-required insurance during the escrow process. The optional ones, like life insurance, can wait, but you really don’t want to wait since the very nature of calamity is that its timing is unpredictable. Something could happen the very day you take possession of the home.

Your lender or agent might recommend particular insurance agents, but you’ll be free to choose whichever agent and company you wish. Make sure to choose insurance companies with financial strength and high customer satisfaction; insurance is useless if the insurer can’t or won’t pay you when you file a claim. Also, just as with any other type of insurance, you should shop around to compare prices.

The internet makes shopping around very simple. You can get online quotes from multiple companies in minutes. You can also enlist a broker who specializes in the type of insurance you want to buy. The broker will then shop for the best policy for you. The best part is that you don’t have to pay them because they are compensated by insurance companies. (See How does an insurance broker make money?)

Impound Accounts

Your lender will not only require you to purchase certain types of insurance; it may also determine how and when you pay your premiums. If your down payment is less than 20%, you will probably be required to establish an impound account. All this really means is that when you send in your monthly mortgage payment for the principal and interest, you’ll also send in the monthly payment for any lender-required insurance and the lender will then forward your payment to the insurance company. In other words, you’ll send one-twelfth of your homeowners insurance premium to your lender with your monthly mortgage payment. If you’re required to establish an impound account, you’ll have to pay your property taxes through it, as well.

If you’re putting down 20% or more, establishing an impound account will usually be an option, not a requirement. Choosing this option can be helpful if you’re not good at paying your bills on time or setting aside money each month for bills that may only be due once or twice a year. But if you like to have total control of your money, you’ll probably want to avoid the impound account.

If you establish an impound account, it will also hold what are called lender reserves, or an extra couple of months’ worth of property tax payments and lender-required insurance premiums. You’ll pay this money when your loan closes. Since borrowers who put down 20% are considered higher-risk, the lender uses the impound account to make sure the home doesn’t become uninsured or get a tax lien filed against it if you run out of money and stop making your monthly payments. The money in the impound account remains yours, and you’ll get any excess balance back when you’ve paid off the mortgage. (Learn more in Understanding Mortgage Impound Accounts.)

You’re almost there! The next section will discuss the closing process.