Mortgage & Equity
12 Insurance
This section will discuss:
The various types of insurance you will need to cover your home investment.
Now that you own a home, you need to look at ways to protect that investment.
Homeowner's insurance - Not only does it make sense to insure your home against fire, storm and so on, but your lender will also require it. The dollar amount of coverage should be equal to the house's replacement value (what it would take to rebuild it in the current marketplace, excluding the cost of the land, which is considered indestructible). A policy for 100 percent of replacement value will, of course, give you the best protection; it will also cost you more in premiums. Most homeowner's policies consist of two types of insurance: coverage against loss or damage of the house itself (and outbuildings), and personal liability insurance to protect you if you are sued when someone gets injured on your property.
Flood insurance - You will need this if you live in a federally designated flood hazard area.
Inflation rider - This automatically increases the coverage amount as the property value increases. If you do not have this rider on your policy, you must be sure at renewal time that the coverage amount keeps up with the value of your house.
Personal belongings - This covers all of your household possessions.
Other Types of Insurance
Fire, tornadoes, hurricanes and other natural disasters aren't the only phenomena that could cause your family to lose your home. It could also happen if you were to die or become disabled. Various types of insurance protect against this type of loss.
Mortgage protection insurance - This is a term life policy that pays off the mortgage if you die.
Other mortgage insurance plans - Other policies are available that pay a predetermined benefit amount upon your death. This amount will pay off your mortgage and any excess benefit will be paid to your family.
Some mortgage insurance plans also include a disability option, whereby the insurance company covers your monthly mortgage payments should you become disabled.
Note that mortgage insurance differs from the private mortgage insurance (PMI) we discussed earlier. PMI insures that should you default on your mortgage and a foreclosure results, the PMI insurance company will pay the lender a predetermined percentage of the outstanding loan. Thus, PMI protects the lender, not you. If you want to be assured that your family won't lose the house if you die or become disabled, you need to carry your own insurance to guard against those outcomes. Your credit union can steer you to the best mortgage life and disability insurance plans.
