Properly Insuring a Home

hands-and-house

Realtor.com quoted me in 3 Types of Insurance You Need to Buy a Home (and 4 You Don’t). It reads, in part,

When you buy a home, you will be showered with offers to buy insurance—and not just one type, but many types. Such awesome deals! So which ones do you really need?

There are a few that are downright essential, and others are nice but not necessary. Furthermore, others are total rip-offs to avoid at all costs.

To help you differentiate among them all, here’s a rundown of the types of insurance you’ll likely encounter on your home-buying journey and a reality check on whether you need them.

Title insurance

Do you need it? Absolutely!

Normally, this isn’t even a question because it’s almost always mandatory when you’re getting a mortgage. But if you’re paying all-cash, you have the option of skipping on title insurance. You shouldn’t.

Title insurance “ensures both the lender and the owner’s financial interests in the home are protected against loss due to title defects, liens, or other matters,” says Liane Jamason, a Realtor® and owner of the Jamason Realty Group at Smith & Associates Real Estate in Tampa, FL.

It’s especially important to get title insurance in transactions like short sales and foreclosures, which often carry the high risk of some kind of tax lien being attached to the property. Title insurance is going to safeguard against your needing to pay for liens, and will ensure the title is clear so no one down the road could claim they own the property and file a lawsuit.

If for some reason you’re dead set against getting title insurance, Jamason suggests you should at least get a lawyer to “thoroughly check the property’s history to ensure there could be no future claims to title.”

Homeowners insurance

Do you need it? You bet

Like title insurance, this is another one that’s not required if you own the house outright (you’ll need to have it with a mortgage), but this is necessary. Homeowners insurance covers you for a variety of things like fires and storms. You’ll want it even if you aren’t legally required to have it.

Eric Kossian, agency principal of InsurePro, a Washington state insurance agency, cites an example of a wealthy homeowner who had paid off his house and “figured since he had never had an insurance claim he would save himself the $700 a year in premium.” Then some kids near his home started a fire, which got out of control and burned down several houses—including his. It cost the homeowner about $450,000 in damages. Consider this a cautionary tale.

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Mortgage protection life insurance

Do you need it? Not really.

In case you die while you’re still paying off a mortgage (bummer, we know), this insurance is supposed to make sure your family is financially covered when it comes to paying your mortgage. But it’s basically pointless.

“I would say as a general rule that mortgage life insurance or mortgage protection insurance is unnecessary,” says David Reiss, a law professor specializing in real estate at Brooklyn Law School. Reiss says consumers “are generally better served by a cheap term insurance policy from a well-rated insurance company,” and “you will generally get more protection per premium dollar with a term life insurance policy.”

Umbrella insurance

Do you need it? Usually not.

Umbrella insurance is basically insurance for your insurance. It vastly expands the amount of damages your insurance will cover. But it’s not necessarily worth it.

“One common rule of thumb is that an umbrella insurance policy should equal the net worth of the insured,” Reiss says. So for the average middle-class American homeowner, Reiss notes that an umbrella policy is generally “less relevant,” probably because your regular insurance covers enough. For the rich, or those who are “reasonably expecting” a rise in income, Reiss says it can be a good idea and worth researching further.

Reiss on Death and Mortgages

Credit.com quoted me in What Happens to Your Mortgage After Death? It reads in part,

Death isn’t on the minds of most homeowners on closing day, naturally, unless it’s a fear of drowning in paperwork. But it’s really never too early to consider what happens to your mortgage should you pass away.

The financial obligation of a home loan does linger after death. There’s a host of scenarios regarding the mortgage’s ultimate disposition, all colored by a homeowner’s estate planning (or lack thereof) and other legal issues.

It isn’t a particularly pleasant topic, but a little bit of planning and paperwork can save your loved ones from considerable headache and hassle during an already difficult time.

“If you’re really thinking about your family’s long-term interests, purchase insurance so they can stay in your home upon your death, and have a will to make everything administratively easy,” said David Reiss, a law professor at Brooklyn Law School in New York.

Keeping the House

Nearly seven in 10 recent homebuyers are married couples, according to the National Association of Realtors, so we’ll focus on them. The co-borrowing spouse will typically be financially liable for the mortgage moving forward.

A spouse who plans to continue living in the home will need to keep current on payments. If you have a life insurance policy in play, your spouse may be able to use the payoff to keep up with or completely wipe out the mortgage balance.

Reiss recommends homeowners consider term life plans rather than actual mortgage term insurance, which can be more expensive.

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Older Homeowners

About a third of people 65 and older have a mortgage, according to the U.S. Census. For older homeowners, it’s important to talk with family members about the property’s long-term future.

Children and grandchildren may not share the same desire to keep a house in the family.

“Do you see it as something your family wants to keep?” Reiss said. “You want to make that as financially easy for them as possible.”