INSURANCE 101

INSURANCE AND ITS ROLE IN HOME OWNERSHIP

Buying insurance makes gives you mixed feelings – one hopes to never have to use it, but will be very glad when you have to! Insurance policies protect the user against different kinds of risk inherent to home ownership. Here are some types of insurance and their differences:

1. Homeoners (or Hazard) Insurance. This is the most common type of insurance, which protects homeowners against partial or total loss in case of events such as fire, earthquake, hurricane, theft, liability and loss of personal property. This policy generally covers only the replacement value for the structure of the home (given that land is not insurable), plus the cost of replacing the lost contents. It is important to update the replacement cost for the structure from time to time, especially if construction costs rise. This policy is purchased annually – generally the bank pays for it at the beginning of the year and charges the owner 1/12 of its estimated cost as part of the escrow funds charged with the mortgage payment.
   
2. Wind & Hail Insurance: Supplements the homeowners policy in case that it does not cover wind and hail. This coverage must be purchased separately (the bank will require it) if the home is in the designated “wind pool” areas. It is purchased annually and it does not cover damages by flooding.
   
3. Flood Insurance: Covers damage by floods, tidal waves, etc. It is supplied by the federal government through FEMA and covers the first $250,000 of value of the home. Supplemental flood insurance can be purchased separately. It is purchased annually and it is required by lenders if the home is in a “flood zone”.
4. Title Insurance: It is purchased once (at closing) and covers the homeowners against claims against the title of the property or boundary defects, liens or judgments that were not discovered by the title search or were not properly recorded at the time of closing.
   
5. Home Warranty: This is an optional policy that protects the homeowners against failure of the mechanical systems of the home: Heating and air conditioning, stove, oven, microwave, washer, dryer, dishwasher, ceiling fans, etc. It is purchased annually.