Insurance is an important, sometimes overlooked, aspect of purchasing a new home. At its most fundamental level, insurance is simply a contract between a homeowner and the insurance company which calls for the insurance company to pay sums to or on behalf of the homeowner in the event of a loss or injury. While this sounds simple, new homeowners should consider some important concepts while shopping for an insurance policy.
Before moving on, it will be helpful to cover a few definitions relative to homeowner’s insurance:
- Agent– A professional who finds and sells insurance policies.
- Binder– A temporary contract provided to prove that the policy holder has coverage until a permanent policy is issued.
- Deductible– Amount that the policy holder must pay in a loss before the insurance company will begin to pay.
- Liability coverage– Covers losses if the home owner is sued and found legally responsible for a person’s injury or property damage.
- Loss Payee – The entity which receives payment in the case of a loss–either a mortgage lender or the property owner if there is no mortgage.
- Premium– The amount paid to obtain or maintain an insurance policy. This number is usually expressed as a yearly fee for insurance coverage.
Premium vs. Deductible: Perhaps the most important decision that a homeowner will make is whether to select a policy with a higher premium and lower deductible, or a lower premium and higher deductible. The decision often revolves around two considerations: budget and risk tolerance. Sometimes, especially if a purchase of a house is at the top of the Buyer’s budget, a lower monthly premium is critical to maintain proper cash flow. If this is the case, remember that while the lower premium may be helpful, budgets that are tight will often be thrown out of balance in the case of claim and high deductible. Conversely, some Buyers are willing to risk higher out-of-pocket costs in the unlikely event of a claim. This decision is largely personal preference.
Amount of Coverage: Your agent will ask you questions about your property to determine the appropriate amount of coverage. Coverage is determined by how much it would cost to replace the property. Ask your agent about other available coverage; for example, personal liability coverage. Increasing protection is often quite affordable.
How to Find an Insurance Agent: As with most other professionals you will encounter in the home-buying process, a happy current or former customer is a great measure of your likely satisfaction. We recommend asking your real estate agent, loan officer, real estate attorney, friends and family for referrals.
Flood Insurance: Flood insurance map and rate changes have caused considerable displeasure (to put it mildly). Most homeowners, when they hear that they do not “need” flood insurance ignore the possibility of purchasing a flood binder. In most cases, if a person is in a low-risk flood area, they will find that the yearly premium for a policy is very affordable (usually a small fraction of the cost of a homeowner’s policy). Loss due to flooding is generally not covered by an ordinary homeowner’s policy.
Why does your Lender care about insurance? Your lender is providing considerable sums to finance your purchase. As part of their calculation of risk, the Lender has determined that should you stop making payments, they could foreclose and sell your property to make them whole. This is called securitization or collateralization. If their security or collateral (the real estate backing the loan) is destroyed, the Lender is open to a complete loss in the event of a casualty. In the event of a loss, your insurance proceeds are the Lender’s collateral. This is important to the homeowner as well: consider a total loss scenario where the house is destroyed. Insurance proceeds will be used to either rebuild the home or pay the outstanding mortgage loan balance. In either case, the Lender and homeowner are protected. It is for this reason that the Lender will require that it is named as a “Loss Payee” or “First Loss Payee.” Your closing attorney will generally request that your insurance company note your mortgage lender as a Loss Payee on an insurance binder. A satisfactory binder is a necessary condition for any financed transaction.
Insurance is a required element of every financed real estate purchase and highly recommended for non-financed or “cash” transactions. By understanding the basics of insurance, the new Buyer is best poised to purchase appropriate insurance at an affordable price.
Stiles Law, with offices located in Boston and Marshfield, Massachusetts, is a firm concentrating in real estate conveyancing and mortgage lending services, representing buyers, sellers, borrowers, banks, mortgage companies, investors, builders and developers in all of their real estate and mortgage transactions. Stiles Law serves all areas of eastern Massachusetts–the North Shore, Boston, and Cape Cod, in addition to the entire South Shore, including: Plymouth, Kingston, Duxbury, Hanover, Pembroke, Marshfield, Scituate, Norwell, Cohasset, Hull, Hingham, Weymouth, Braintree, and Quincy.
Copyright © 2017 Stiles Law, All rights reserved. Stiles Law is a Massachusetts licensed law firm and all content is based on Massachusetts law. The information presented above is meant to be used for general informational purposes and it should not be construed as legal advice or legal opinion on any specific facts. No child labor laws were breached during the creation of this Blog, further Bob Bonkley was compensated for his likenesses and appearances in the same.