When you buy a home, you will be showered with offers to buy insurance—and not just one type, but many types. Such awesome deals! So which ones do you really need?
There are a few that are downright essential, and others are nice but not necessary. Furthermore, others are total rip-offs to avoid at all costs.
To help you differentiate among them all, here’s a rundown of the types of insurance you’ll likely encounter on your home-buying journey and a reality check on whether you need them.
Do you need it? Absolutely!
Normally, this isn’t even a question because it’s almost always mandatory when you’re getting a mortgage. But if you’re paying all-cash, you have the option of skipping on title insurance. You shouldn’t.
Title insurance “ensures both the lender and the owner’s financial interests in the home are protected against loss due to title defects, liens, or other matters,” says Liane Jamason, a Realtor® and owner of the Jamason Realty Group at Smith & Associates Real Estate in Tampa, FL.
It’s especially important to get title insurance in transactions like short sales and foreclosures, which often carry the high risk of some kind of tax lien being attached to the property. Title insurance is going to safeguard against your needing to pay for liens, and will ensure the title is clear so no one down the road could claim they own the property and file a lawsuit.
If for some reason you’re dead set against getting title insurance, Jamason suggests you should at least get a lawyer to “thoroughly check the property’s history to ensure there could be no future claims to title.”
Do you need it? You bet
Like title insurance, this is another one that’s not required if you own the house outright (you’ll need to have it with a mortgage), but this is necessary. Homeowners insurance covers you for a variety of things like fires and storms. You’ll want it even if you aren’t legally required to have it.
Eric Kossian, agency principal of InsurePro, a Washington state insurance agency, cites an example of a wealthy homeowner who had paid off his house and “figured since he had never had an insurance claim he would save himself the $700 a year in premium.” Then some kids near his home started a fire, which got out of control and burned down several houses—including his. It cost the homeowner about $450,000 in damages. Consider this a cautionary tale.
Extra moving insurance
Do you need it? Yes, if you’re smart.
Bare-bones, federally mandated moving coverage offers just 60 cents per pound of an item, and is known as “released value protection.” So if something breaks and that’s your only coverage, you won’t get back the full cost of the item, just what’s calculated under the coverage limits.
There’s also “full-value protection,” which can be purchased from the moving company, but you need to specify which items are worth more than $100 per pound. The moving company can opt to repair the item back to its original state, or give you the fair market value of the item—not necessarily what you paid for it. Plus, full-value protection excludes items over $5,000. Opt for this instead of released value protection. (Rates vary by moving company—it’ll be more than released value, but it’s worth it.)
If you’re moving some really valuable stuff, you can purchase extra insurance from a third-party insurance provider. This typically costs $100 per $10,000 of coverage.
Do you need it? It depends on where you live and how lucky you feel.
Flood insurance is a tricky one. Requirement for flood insurance can be mandatory for homes in flood-prone areas. Otherwise, it’s optional. The biggest problem with flood insurance is you don’t know you need it until it’s too late. Last year, flash floods in Texas and Oklahoma washed homes away. In 2012, Hurricane Sandy hit the Northeast and left thousands in low- or moderate-risk flood zones with water-damaged homes.
Torrential rain and freak storms can happen anywhere.
“If you are not in a designated flooding area, it is still a wise idea to get flood insurance, and typically it is very affordable if you are not in a low-lying area,” Jamason says.
So this one’s sort of a toss-up. If you have it, you may never need it. But it’s worse to really need it, and then not have it. A similar argument can be made for earthquake insurance.
Private mortgage insurance
Do you need it? Hopefully no.
For most loans, private mortgage insurance is mandatory if you don’t have a 20% down payment. But if you can put down at least that amount, it’s well worth doing to avoid PMI. The reason: Mortgage insurance benefits only the lender—it does nothing for you, so get rid of it as quickly and cheaply as possible. Some options to avoid PMI include piggyback loans, lender-paid PMI, and single-payment PMI.
Mortgage protection life insurance
Do you need it? Not really.
In case you die while you’re still paying off a mortgage (bummer, we know), this insurance is supposed to make sure your family is financially covered when it comes to paying your mortgage. But it’s basically pointless.
“I would say as a general rule that mortgage life insurance or mortgage protection insurance is unnecessary,” says David Reiss, a law professor specializing in real estate at Brooklyn Law School. Reiss says consumers “are generally better served by a cheap term insurance policy from a well-rated insurance company,” and “you will generally get more protection per premium dollar with a term life insurance policy.”
Do you need it? Usually not.
Umbrella insurance is basically insurance for your insurance. It vastly expands the amount of damages your insurance will cover. But it’s not necessarily worth it.
“One common rule of thumb is that an umbrella insurance policy should equal the net worth of the insured,” Reiss says. So for the average middle-class American homeowner, Reiss notes that an umbrella policy is generally “less relevant,” probably because your regular insurance covers enough. For the rich, or those who are “reasonably expecting” a rise in income, Reiss says it can be a good idea and worth researching further.