Is There a Minimum I Must Insure My House For?
Federal laws don't require people to buy homeowner's insurance. However, federal laws do allow lenders to require homeowners to purchase insurance when they take out mortgages; if homeowners refuse to do so, the lender can buy it on their behalf. The amount of the policy must cover the outstanding balance on the mortgage.
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Cash Value Versus Replacement Cost
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Insurance companies use two different pricing methods when writing policies: cash value and replacement cost. A cash value policy considers the true cost of a house, taking into account its age, existing problems and general condition. Insurance companies pay out claims that are based on the market value of the home or the part of the home in need of repair. Replacement cost covers the cost of actual repairs or replacement. Generally, replacement policies pay out higher dollar amounts and are therefore more expensive to buy.
Flood Insurance
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The Federal Emergency Management Agency, or FEMA, maintains records of areas of the nation that are classified as flood zones. People who own financed land or buildings in flood zones normally have to buy flood hazard insurance. Lenders may even require people who finance undeveloped plots of raw land to purchase flood insurance. The federally backed National Flood Insurance Program issues flood insurance policies in all 50 states; relative to other forms of insurance, flood policies are relatively inexpensive. Lenders normally require policies that cover the amount of the outstanding loan.
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Liability Insurance
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Insurance agents often recommend that people buy liability insurance. This coverage protects homeowners from lawsuits stemming from other people having accidents and getting hurt on their property. People who hire contractors to work on their homes are particularly at risk from injury claims and lawsuits. Additionally, agents may add medical coverage to liability policies to cover the cost of medical treatment and hospital stays of injured persons. However, certain state laws still allow injured workers to sue homeowners for sums of money in excess of liability insurance coverage limits.
Other Considerations
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In addition to insurance requirements imposed by lenders, homeowners must determine how much coverage they need for themselves and their possessions. Basic homeowner's policies provide limited coverage for personal belongings, so people with expensive jewelry or heirlooms should buy additional coverage.
People who own their homes free and clear don't have to buy any insurance, but typically, insurance premiums are relatively minor when compared with the cost of rebuilding a home after a fire or hurricane. People should buy sufficient coverage to protect them from all kinds of loss unless they're comfortable with their ability to handle expenses without the benefit of insurance coverage.
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