Homeowners’ policy is a must-have. Well, maybe not by law, but yes there are many reasons that you just cannot avoid it. Yes, unlike car insurance, it is legally OK to own a house without a homeowners’ insurance policy. But your lender definitely does not think like this. He will surely want you to have a policy against your home. So, if you are thinking about why you need to have homeowners’ insurance? Then you have arrived at the right place. We will discuss exactly why you need homeowners’ insurance and lots more!
5 Major reasons why you need homeowners’ insurance!
As we already know, it is not mandatory by law. But, we must understand that it is mandatory for us and our financial security. Let’s see 5 major reasons why you need homeowners’ insurance:
#1: It is your house’s guardian:
Let’s consider a case when a fire incident happened in your home. Now, you have to spend a huge amount of money to repair and rebuild what is destroyed. This must cost you a fair amount of your savings. But insurance helps you out in such a scenario. It will pay you whatever the cost of repairing is. But keep in mind that the amount you will receive is subject to many factors. Thus be cautious while choosing your policy.
#2: It protects your belongings too:
Homeowners’ insurance also protects your belongings. You have collected them with much love and your hard-earned money. But if they are burnt in a fire accident or get stolen, the insurance company will pay for it. This will help you replace or repair it. This will definitely ease out the pain and relax you a bit.
#3: It is a shield against lawsuits:
You are liable for any damage to any person that occurs on your property. If the person gets hurt, then he or she may sue you for the damages. Since it is your liability, it protects you from it, this type of coverage is personal liability. This may come in handy on any bad day. You must always have this one.
#4: Your lender may feel it is mandatory:
Lenders are at financial risk when they lend over an uninsured property. For Example, if a hurricane comes, and your house is damaged and is brought to zero. Then you would be worried about rebuilding it and repaying the old debt will not be possible. In such a situation, even foreclosure of the loan is not a big enough risk to you. Because the home is already brought down. In such conditions, the lender and you both will face losses. Thus, insurance provides the necessary cover to you and the lender.
Lenders in the USA have legal rights to demand a homeowners’ policy from you before lending you the money.
#5: Gives you peace of mind:
Like all insurances, this one also gives you peace of mind that if something unforeseen and bad happens. You are protected. Otherwise, you may need to shell out huge amounts from your pocket. Situations can get pretty nasty without insurance. Thus, for some good sleep and peace of mind, do have a nice policy with all the required coverage and till the right limits.
Thus, homeowners’ insurance is a must-have. We discussed why lenders demand a policy against your home. Now, let’s see which policies they may demand and why!
Which policies specifications your lender can ask for?
Lenders may require different policies depending on the risks your home is susceptible to. They may demand not only a policy but a minimum coverage limit of it too. All of this depends on many factors. Talk about everything before you buy a policy.
Also read: What Does A Home Warranty Cover?
Some policies specifications that may be required and you must think about are:
#1: Types of insurances:
They may ask you to acquaint your current insurance with policies like flood insurance or insurance against earthquakes, cyclones, etc. as per the requirement. Certain riders and add-ons may also be required according to your conditions. For example, if you live in floodplain areas ‘A’ or ‘B’ then you may be required to have flood insurance.
#2: Type of payout structure:
There are two types of payout structures: Replacement Cost Value (RCV) and Actual Cash Value (ACV).
Actual Cash Value. Well, what it means is, say your house is old. And it gets damaged due to a cyclone. Then in ACV, your insurance policy will pay you the amount minus the depreciation. Thus, if your house is 80 years old. You would not get much from your insurer.
But in Replacement Cost Value, you will get the exact amount that you will incur if you rebuild your house today. This payout method does not consider the depreciation associated with the house.
Thus, if your property is old, then lenders will usually demand that you have an RCV payout structure.
Also, if your house is situated in an area that is prone to natural calamities like earthquakes or hurricanes, etc., then the lender may even demand that you have ERC, i.e. Extended Replacement Cost. ERC means when say a hurricane strikes and your house is destroyed. In such times, the cost of rebuilding goes up. So, now, if you have an ERC payout structure, you will get the payout according to surged prices.
#3: The lender must be made ‘Loss Payee’:
Your insurer requires that you make the lender and yourself both as ‘Loss Payee’. What this means is that, if something bad occurs and you file a claim. And if the claim is accepted and you get the check. Then to encash it, your lender needs to sign it. So, it is ensured that the money goes into compensating for the loss. This protects your lender and ensures the money does not goes wasted.
A homeowners’ policy may not be mandatory by law. But, it definitely is required for your own safety and loan purpose. Do go for a policy because if you don’t, then your lender will take a policy for you. And although it sounds like a relief, it actually is an unnecessary expenditure. Because these policies are 2 to 3 times more costly and that too with lesser coverage. And this overhead is added to your monthly EMI. So, be vigilant and get a policy for yourself with your desired coverage. You can also consult a financial advisor before taking up a policy. While some good insurance companies are Allstate, Geico, etc.
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