Buying a home is an exciting milestone that comes with a slew of less than thrilling responsibilities. Between maintenance costs, property taxes and possible HOA fees, you might wonder if your home insurance policy is a required expense or one you can forgo. Bankrate’s team of licensed insurance experts aims to help you make sense of homeowners insurance — is it legally required or simply a good idea to have in the event of a catastrophe?

Key takeaways

  • States do not legally require homeowners to have home insurance, but it is usually required by your lender if you currently have a mortgage on your home.
  • Home insurance provides financial protection from unexpected losses due to physical perils like fire and wind damage, as well as potential liability concerns for things like dog bites or slip-and-falls.
  • Most mortgage lenders require home insurance coverage up to the rebuilding cost of your home but, depending on the climate and other circumstances in your specific location, additional coverage for flood or earthquake may be required.

Is homeowners insurance required?

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. However, if you have a mortgage, your lender will most likely require you to carry homeowners insurance 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. After all, your home may be the most significant purchase you make in your lifetime, and 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.

California is a perfect example of a state where climate strongly impacts the cost and type of coverage a homeowner policy will need. The average cost of California homeowners insurance is $1,225 per year for $250,000 in dwelling coverage. While there isn’t a minimum home insurance requirement in California, additional wildfire, earthquake and flood insurance may need to be purchased depending on your home’s exact location. Always check with your agent for guidance on the appropriate levels of homeowners insurance.

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 ensured 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 on your basic policy, or, in certain states, like California, as a separate policy.

Hazard insurance is another term you may encounter while reviewing your mortgage contract. What is hazard insurance on a mortgage? It is simply another word for home insurance that focuses on the physical perils of your dwelling and personal belongings. If you have an active homeowners insurance policy, you have hazard insurance.

Mortgage insurance vs. homeowners insurance

Mortgage insurance vs. homeowners insurance, is there really a difference? Yes, homeowners insurance protects the homeowner by paying for damages 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 downpayment to purchase the home falls below 20%.

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 downpayment — 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 may differ from the market value of the home. This amount is usually determined by the insurance company using a specialized tool and the specific details of your house. 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” 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 out of pocket for the entire cost to repair or rebuild 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.

Frequently asked questions

    • 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.
    • 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.
    • There’s no single company that offers the best and most cost-effective policies for everyone. There are multiple factors that go into determining your premium, so the company that gives your neighbor a great rate may not work for you. Most insurance experts recommend sourcing quotes from several companies so you can compare rates. You could start your search with Bankrate’s research into the cheapest homeowners insurance companies.
    • Yes, if the bylaws (or rules) set forth by your homeowner’s 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.