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Is homeowners insurance required?

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Man sits in the living room on the floor in front of the television with his kids and the family dog.
Oliver Rossi/Getty Images
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If you own your own home, you probably know that homeowners insurance is an important tool to protect what is likely your biggest investment. It can protect your finances if your home is damaged by a covered peril such as natural disasters such as fire or hailstorms. If your home is damaged or destroyed, it may help pay to rebuild or repair it. But is homeowners insurance a requirement of ownership? That depends. Bankrate can help you sort out what is mandatory, and what is just a good idea to have on hand in the event of a catastrophe.

Is homeowners insurance required?

That depends on the circumstances. If you are wondering if homeowners insurance is required by law, the answer is no. Homeowners insurance is not required by state or federal law. This is different from auto insurance, where most states have minimum requirements for how much coverage you need before you can hit the road. It’s worth noting, however, that you may be required to carry homeowners insurance if you have a mortgage, so that your lender can protect their interest in your home.

However, even if home insurance isn’t legally required, it may still be in your best interest to purchase a policy. Homeowners insurance comes with a host of benefits, including coverage for a number of unexpected losses that occur on your property.

Do mortgage lenders require insurance?

As we already mentioned, even though it isn’t required by law, homeowners insurance is usually required for mortgage purposes. 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 ensured a payout in the event some type of catastrophe occurs.

Because standard home insurance policies do not cover flood damage, 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 the house, but you can also search by your address through online FEMA flood maps.

Even if you are not in a flood zone, flood insurance can be a good investment if you are near any body of water—even a small one—that could conceivably flood after a downpour. Your realtor or your neighbors may be able to tell you if flooding has ever been a problem in your local area.

Another type of insurance you may be required to purchase if you have a mortgage is earthquake coverage, if you live in an area where these are common, such as parts of the West Coast. This is often sold as a rider on your basic policy.

When you take out your home insurance policy, you may see a “loss payee clause” listed. This means that both you and the lender receive reimbursement for any damage caused when you file a claim. This helps to protect your lender’s stake in your property if damage occurs.

How much homeowners insurance do lenders require?

In most cases, a lender requires you to insure your home up to the rebuilding value. This amount is usually determined by the insurance company using a specialized tool and the specific details of our house. However, mortgage lender requirements can vary, so be sure to talk with your lender to understand what kind of coverage you need to have.

Other reasons you need homeowners insurance

On top of your lender being financially protected by a homeowners insurance policy, you get a lot of protection as well. In fact, there are four key areas of financial protection included in a standard home insurance policy.

  • Dwelling coverage: This part of your policy covers the structure of your home. If it sustains any kind of damage from a covered event, such as fire, wind or vandalism, you can file a claim and be reimbursed for repairs.
  • Personal property: Homeowners insurance also covers your belongings. If items are damaged in a covered loss, you’ll be covered up to a certain amount. You may need a policy rider for items with high values, like jewelry or electronics.
  • Personal liability: If someone is injured on your property, you could be sued to cover their medical expenses. Your homeowners insurance offers personal liability coverage, which pays  if you’re found responsible for guest injuries. It also applies to damage to someone’s property that happens at your home.
  • Additional living expenses: This covers your living expenses, like hotel and meals, \ if you have to stay somewhere else while your house is being repaired after a covered loss.

In addition to these four basic coverages, there are other options you can add to your policy to give it additional functionality. The most common type of homeowner policy, the HO-3, protects you from 16 “named perils,” which include some of the more common disasters that can happen to your home.

But there are omissions, such as flood coverage, as we noted above, and other, less common mishaps. You can often purchase additional, optional coverage called endorsements, or riders, which will protect you from less common disasters. These may include coverage for things like earthquakes, sinkholes or sewer backups. An increasingly common one covers you for the cost of recovering from identity theft. You can choose your endorsements when you purchase your policy, or add them on later if needed. Speak with a licensed insurance agent to learn more about your options and what you may need for your situation.

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Written by
Lauren Ward
Insurance Contributor
Lauren Ward has nearly 10 years of experience in writing for insurance domains such as Bankrate, The Simple Dollar, and Reviews.com. She covers auto, homeowners, life insurance, and other topics in the personal finance industry.
Edited by
Insurance Editor