Why Do I Pay Homeowner's Insurance in Advance?
Homeowner's insurance typically covers against damage to or loss of the dwelling and other structures, personal effects, personal liability and medical payments, and living expenses. All of these aspects of insurance concern the homeowner. Only two of them, the structures and the liability issues, concern the lender. While homeowner's insurance is regulated by individuals states within the United States, the concerns of the lender or mortgage holder are the main reason insurance is paid in advance across the country.
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Perils
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A condition that can result in a loss is known as a peril. Theft, fire and windstorm are examples of perils. For a homeowner, having a homeowner's insurance policy helps protect the dwelling and any other structures on the property such as fences, sheds, detached garages and guest houses in the event of a covered peril. The lender also benefits from the insurance, because the homeowner has borrowed the money to buy the home. Without the home being insured, in the event of a peril such as a fire, the lender could be left with no property and no money. Since perils can and do happen suddenly and without warning, the lender almost always requires that homeowner's insurance be paid in advance throughout the duration of the mortgage loan.
Liability
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If an accident occurs at a home and a visitor is injured, or if through the homeowner's negligence a guest or visitor is injured at the insured property, the homeowner could have financial liability. Homeowner's insurance helps protect the homeowner from potential financial loss caused by being liable for damages to people and their property. The lender is vested in the homeowner being able to cover any liability expenses associated with the property and requires homeowners to have liability insurance. Since accidents and negligence can occur at any time, lenders usually require that homeowner's insurance is paid in advance throughout the term of the mortgage.
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Home Purchase
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When a home buyer purchases a house, the lender usually requires the payment of a full year's worth of homeowner's insurance. The process of paying the premium in advance of the closing of the purchase transaction is called binding the coverage. In some locations, additional and separate flood insurance may be required before the house deal can close, and the entire first annual premium has to be submitted as well.
Condominium Purchase
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With a condo, the owner usually buys insurance to cover personal effects, and perhaps personal liability, medical payments and living expenses insurance. Usually the condominium homeowner's association pays for insurance to cover the structure and common areas within the condo complex. The insurance premiums may be paid in advance, but because they are paid from the collective association fees, the individual condo owner may or may not be aware of the payment schedule.
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