Is home insurance required? What homeowners need to know

Purchasing a home may be the most significant investment you make in your lifetime. As such, insurance experts recommend financially protecting your investment with homeowners insurance. Home insurance is not required in the same way that car insurance is in most of the U.S. That is, your state does not have laws or regulations requiring you to purchase a policy. If you have a mortgage, however, it is likely that your mortgage lender will require you to insure the property to protect their financial interest in it. Bankrate’s insurance editorial team produced this guide to help homeowners determine if they need insurance and how insurance may be beneficial.

Do you need home insurance?

If you are wondering if homeowners insurance is required, most states do not mandate coverage. Neither does the federal government. This is different from auto insurance, where most states have minimum requirements for how much coverage you need before you can hit the road. However, if you have a mortgage, your lender will most likely require that you carry a homeowners insurance policy to protect the financial interest it has in your home.

Even if you aren’t required to carry homeowners insurance by your lender, most insurance agents and financial professionals suggest having a policy in place. An insurance policy could ensure your investment is financially protected against situations such as fire, storm damage, vandalism and other perils. Additionally, homeowners insurance may provide important liability protection if someone hurts themselves in your home or on your property.

Can a homeowners association require home insurance?

If the bylaws (or rules) set forth by your homeowners association (HOA) state that you must carry homeowners insurance, then you must carry homeowners insurance. This applies even if you own your home outright and otherwise aren’t required to carry coverage. Failure to follow your HOA’s bylaws could prove to be a costly mistake with heavy consequences. For instance, if your HOA requires you to carry homeowners insurance and you fail to do so, the HOA could issue you a fine, take you to court and, in the most extreme of cases, put a lien on your house.

Do mortgage lenders require insurance?

Even though it may not be required by law, mortgage lenders typically require you to carry homeowners insurance. When you take out a mortgage or other type of home loan, the bank has a financial interest in your property. With a homeowners insurance policy in place, your lender is assured a payout in the event a covered peril occurs.

Standard home insurance policies do not cover flood damage, so you may also be required to add on flood coverage if your home is located in a designated flood plain. This information is usually disclosed when you buy a house, but you can also search by your address through online FEMA flood maps.

Another type of insurance you may be required to purchase if you have a mortgage is earthquake coverage. This is more likely if you live in an area where earthquakes are common, such as parts of the West Coast. This is often sold as an endorsement added to your basic policy or as a separate policy in certain states like California.

Hazard insurance is another term you may encounter while reviewing your mortgage contract. Hazard insurance is a term mortgage companies use to specify the portion of your homeowners insurance policy that covers its insurable interest, the dwelling and other structures. The remaining sections of a home insurance policy provide coverage for personal property and liability, which benefits the policyholder but is of no concern to the mortgage company. If you have an active homeowners insurance policy, you have hazard insurance.

Mortgage insurance vs. homeowners insurance

While they sound similar, there is a difference between mortgage insurance vs. homeowners insurance. Homeowners insurance protects the homeowner by paying for damage resulting from a covered homeowners claim. In contrast, mortgage insurance protects the mortgage lender when homeowners default on their home loan. Typically, mortgage insurance is a separate policy homeowners pay for in addition to home insurance when the down payment to purchase the home falls below 20 percent.

Private mortgage insurance or PMI may be a part of your monthly payments for the life of your home loan. However, if your home reaches 20 percent in home equity — essentially builds up the 20 percent requested as part of the original down payment — you may be able to cancel your PMI.

How much homeowners insurance do lenders require?

In most cases, a mortgage lender requires you to insure your home up to the rebuilding value, which differs from the market value of the home. This amount is usually determined by the insurance company based on specific details of your home, such as square footage, location and building materials. However, lender requirements can vary, so be sure to talk with your lender and work with your insurance company to understand what kind of coverage you need to have.

You may see a “loss payee clause” or a “mortgage clause” listed when you take out your home insurance policy. In this case, both your name and the lender may be listed on the claim check when you receive reimbursement from a covered claim. This helps to protect your lender’s stake in your property if damage occurs.

Other reasons to consider homeowners insurance

Aside from mortgage lender requirements, there are other reasons to consider homeowners insurance. For instance, it provides financial protection so you are not responsible out of pocket for the entire cost of repairing or rebuilding your home after experiencing a loss. In fact, there are six key areas of financial protection included in a standard home insurance policy.

• Dwelling coverage: The dwelling coverage part of your policy covers the structure of your home. If it sustains damage from a covered event, such as fire, wind or vandalism, you can file a claim to potentially help pay for repairs.
• Other structures coverage: Depending on the property, your other structures coverage may play a large part in a robust home insurance policy. This option provides financial protection for structures other than your house, such as a detached garage, shed or fence.
• Personal property coverage: Homeowners insurance also provides coverage for your personal belongings. If items are damaged in a covered loss, you’ll be covered up to your policy limits. You may need a policy rider for high-value items, like jewelry or electronics.
• Personal liability coverage: If someone is injured on your property, you could be sued to cover their medical expenses. Your homeowners insurance offers personal liability coverage, which may pay if you’re found at fault for guest injuries. This coverage may also apply if someone else’s property is damaged at your home.
• Medical payments coverage: While this coverage is sometimes confused with personal liability, these options are not the same. Medical payments coverage may help pay for medical expenses if someone hurts themselves on your property, no matter who is at fault for the injury. It’s also important to note that medical payments coverage typically carries a much smaller limit than liability coverage — usually $1,000 to $5,000 for medical payments compared to $100,000 to $500,000 (or more) for personal liability.
• Additional living expenses: This option will help pay for your extra living expenses like hotel costs and meals if you have to stay somewhere else while your house is being repaired after a covered loss.

What coverage options can I add to my homeowners insurance policy?

In addition to the six basic coverage options listed above, there are other endorsements you may be able to add to your policy for additional financial protection. The most common type of homeowners policy, the HO-3, covers your dwelling and other structures on an “open perils” basis, but covers your belongings on a “named perils” basis, and extends coverage for 16 named perils. Even though your home may be covered on an open perils basis, most HO-3 policies still have exclusions like floods, sinkholes, pests and more.

Endorsements are optional coverage types you can add to your homeowners insurance policy. For example, earthquakes and floods are exclusions on a standard home policy, but you may be able to get an endorsement or stand-alone policy to cover either natural disaster. Other common endorsements include sewer backup and sump pump failure coverage.

Most standard home policies have a set limit for high-value items, like fine arts, furs and jewelry, which may not be enough to cover your most precious items. Valuables coverage or a separate scheduled personal property policy may help tailor your home insurance to your specific personal property needs.

Optional endorsements and policy supplements vary by insurance company and state, so speaking with a licensed insurance agent may help you determine how to customize your policy.

What is required for homeowners insurance?

In some situations, homes do not qualify for a standard homeowners insurance policy. Here are some standard requirements needed for a home to be insurable:

• • Named insured must have an insurable interest

    Insurable interest is the foundation of any insurance policy. Whoever will suffer financially from the insured object being damaged or destroyed has an insurable interest. For a standard home insurance policy, it means only the person who owns the home can purchase homeowners insurance for it.

  • Home must be owner-occupied

    Occupancy is connected to the insurable interest of the home. Homeowners who consistently live in the home are there to properly maintain the property and prevent any issues that could cause damage and eventually result in a claim. If the homeowner turns the property into a rental or a seasonal home where it is no longer their primary place of residence, they should consider vacation or dwelling insurance instead.

  • Home cannot be vacant or unoccupied

    An unoccupied home is a dwelling without people for 30 days or more, while a vacant home is without people or furnishings for 30 days or more. Homes that fall into either category are generally not eligible for standard insurance since they are a prime target for vandalism and squatters.

  • Homes should be standard construction

    Homes must pass underwriting guidelines for insurance to remain in place. While every carrier has different rules, homes constructed of materials that are too expensive to replace and homes that don’t follow standard construction are challenging to insure. This applies especially to tiny homes, log homes, yurts and other DIY homes that pose a higher risk of loss.

  • Home cannot be used for commercial use

    A business use endorsement can be added to home policies when it is available through the insurance provider. However, homes with commercial use are considered more high-risk and are likely to have equipment and materials better suited for a commercial policy. Commercial farms and ranches are a perfect example of a standard home not qualifying for home insurance due to the cost and risk of livestock and machinery.

  • Named insured can not have a past conviction of arson

    Homeowner policies exclude any intentional damage or illegal activity that causes damage or bodily harm done by the named insured. Homeowners who have been convicted of arson, fraud and other crimes that indicate a high risk of libelous behavior typically have a hard time finding coverage.

What happens if you don’t have home insurance?

If you have a mortgage or other home loan, keeping an insurance policy in place is likely a requirement of your loan agreement. Your lender will be notified of policy renewals and cancellations. If you fail to purchase coverage or let it lapse, your company may send your mortgage into default. Alternatively, the lender could choose to buy a policy on your behalf. This is called force-placed insurance, and it is generally more expensive and provides less coverage than a policy you would purchase on your own. Furthermore, if you don’t have home insurance and a disaster damages or destroys your house, you will be responsible for paying for repairs out of pocket.

Frequently asked questions

• • Do I need home insurance to close on my house?

    If you finance your home, your lender typically has homeowners insurance requirements that you must meet to close on your house. These can include getting minimum coverage limits and types in place, paying the premium and providing proof of insurance at closing. If your mortgage is set up with an escrow account for your insurance and taxes, your home insurance company will likely provide an invoice to the mortgage to pay the annual premium as part of the closing process. But if your mortgage is set up so that you pay your own home insurance, you’ll probably need to pay the annual premium yourself and bring a receipt to closing.

  • Who has the best cheap homeowners insurance policies?

    Since insurance policies are specific to your situation, there is no single company that will always write the cheapest insurance for everyone, all the time. Insurers take into account multiple factors when they underwrite your policy, such as your location, your home’s age and your credit history. When looking for the cheapest rates, it can help to shop around and ask for quotes from several companies known for affordable coverage to see which offers you the most competitive rate. (Remember to specify the same coverage types and policy limits for a fair comparison.) Other strategies that may help save money include ensuring that you’re receiving all the discounts you are eligible for or increasing your deductible. However, adjust your deductible with caution — you’re responsible for paying this amount in the event of a covered claim, so be sure you can easily afford to do so.

  • Is homeowners hazard insurance required on all mortgage loans?

    Since hazard insurance is the portion of the standard homeowners policy that covers the dwelling and other structures, yes, it is typically required on all mortgage loans. However, it is not a standalone policy requiring a separate payment. If you receive any correspondence from your bank stating that you have insufficient coverage, work with your insurance agent to change the dwelling and other structures coverage amounts on your homeowners policy to meet your mortgage company’s requirements.

  • What is the best homeowners insurance company?

    The best homeowners insurance company will vary for every person and will depend on your coverage needs and budget. Consider the type of coverage that you may require depending on where your home is located and the types of threats that you may face based on weather and other conditions. It is best to shop around and compare home insurance rates by requesting quotes from insurance providers to find the option that is best for you.