Is Homeowners Insurance Required?

Although homeowners insurance is not required by law, most banks and other mortgage lenders require their customers to have one in order to protect the loan's value. You do not need homeowners insurance if you have already paid off your mortgage. Having said that, it is an effective way to safeguard one of your most valuable assets.

Is it necessary to have homeowners insurance?

Because the government does not require homeowners insurance, you could go without one if you've paid off your mortgage — but we recommend you get one anyway. If you have a mortgage, your lender may require you to purchase and maintain a policy, even though you are not legally required to do so.

Why do mortgage lenders require homeowners insurance?

Homeowners insurance is required by mortgage lenders to protect the value of their investment.

Assume you were not required by a bank to be insured, and a fire sweeps through your neighborhood, destroying your home. If you were unable to pay for the house's reconstruction, the bank's loan would be worthless, and your lender's investment would be completely lost.

As a result, lenders may require you to obtain flood insurance if you live in an area prone to flooding, such as a coastal region prone to hurricanes or heavy rainfall. Similarly, your bank may require you to obtain additional riders to protect yourself against policies that aren't typically covered by your standard homeowners insurance policy.

Depending on where you live and which company provides your loan, you may have to purchase coverage for backed-up water or even earthquakes.

What happens if you go without homeowners insurance?

If your lender requires you to have homeowners insurance, you can't go without it.

Assume, for example, that you stopped paying for your policy after receiving your bank loan. If you fail to make a payment, you will usually receive notification by mail or phone that your insurer has not received your payment. Your coverage will lapse after 30 days or multiple missed payments (depending on the insurer).

If your insurance lapses, you have failed to meet the requirements of your mortgage, and your lender will assign you to a force-placed insurance policy. Forced policies are typically much more expensive and may provide less coverage than your previous policy.

Because the bank only has a stake in the structure of your house, a lender-placed policy may not provide adequate protection for your personal property. Obtaining a new insurance policy after having a lender-placed policy can also be difficult, and if you are unable to pay for your lender-placed policy, you may face foreclosure.

If you are concerned about missing a homeowners insurance payment, you should contact your insurer. Payment deferrals are sometimes allowed by insurers due to unforeseen circumstances, such as losing your job.

Most insurers allow you to set up autopay if you have trouble remembering to pay your bill on time. Furthermore, many lenders allow you to pay for homeowners insurance directly through an escrow account.

Why do you need homeowners insurance?

If you choose not to purchase homeowners insurance, you will be responsible for paying for any damage to your home out of pocket. This means that if you didn't have insurance, you'd be vulnerable to everything from broken windows to tornadoes and fires that could completely destroy your home.

Assume a fire destroys your home. You would have to pay for the entire cost of rebuilding on your own if you did not have dwelling coverage as part of your home insurance policy. Replacing your physical home after a destructive fire is only the beginning of your problems.

In this case, having a homeowners policy would also provide you with additional living expenses if your home became uninhabitable. If you had to stay in a hotel while your house was being rebuilt and didn't have insurance, you'd be stuck with a hefty hotel bill, especially if you lived in a big city like New York or San Francisco.

Your belongings would not be covered by the personal property protection that comes with a homeowners policy if you did not have insurance. If the fire that destroyed your home also burned your belongings, you may have to pay another large sum before you can return to your previous standard of living.

A homeowners policy, in addition to covering damage to your property, provides liability coverage in the event that someone sues you for personal injury or property damage. Consider the following scenario: your dog bites a passing jogger, sending them to the hospital with injuries. Even if you won the case, you would have to pay for litigation fees if they sued you for damages. If you lose the case, you may have to pay even more money for the injured person's medical bills.

Do you need homeowners insurance for extended perils?

You don't need homeowners insurance for long-term perils if you don't have a mortgage. Even if you have a home insurance policy, you may not be protected against a few potentially hazardous perils.

For example, if you live in a low-lying area and do not have flood insurance, you may be just as vulnerable as the uninsured. If your property is damaged, you will be responsible for covering any costs incurred as a result of the flood damage.