Definition, role in home insurance

  • Term insurance is part of home insurance that covers damage caused by fire, weather, and other natural events.
  • Floods and earthquakes are the two main exclusions for term insurance.
  • Your lender will advise you of the minimum coverage required, but you will likely need more.

Home insurance consists of several parts. One is called risk insurance, also known as home insurance. Lenders need it to protect their investment in your home.

What is hazard insurance?

Hazard insurance is the part of your homeowners policy that protects you against losses from perils such as fire, storm, hail, and other disasters. New home buyers are sometimes confused by the term when their mortgage documents specifically state that they need term insurance, often thinking it’s some sort of additional coverage outside of their homeowners policy.

“Perilance insurance refers to a single section, called Coverage A, of a property insurance policy,” says Brittany Alexander of Premier Property Law. “Cover A covers damage to the building itself, such as the roof, walls, and windows. Personal property and liability are covered by other sections.”

If damage occurs and the event that caused the damage is covered by your policy, you will be compensated up to and including the cost of rebuilding your home, depending on the level of your coverage and the amount of damage incurred.

Liability insurance is not required by law. But if you have a mortgage, your lender will require it to protect their investment in your home. In addition, your lender’s right to require you to take out term insurance is protected by law to the extent that your lender may issue a policy on your behalf and charge you for it if they have reason to believe that you are the failed to meet the requirement to have the coverage.

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What does hazard insurance cover?

If your house or other structures on your property are damaged or destroyed, liability insurance will take effect.

“Peril insurance covers the cost of damage to your home from natural or man-made disasters, such as fire, lightning, hail, and even vandalism,” says Steve Wilson, Sr. underwriting manager at Palo Alto, California-based insurance company Hippo.

“While homeowners insurance covers multiple risks as a whole, hazard insurance specifically covers the structure of your home, such as: B. walls, floor and roof, and offers financial help to replace or repair your home,” he says.

Perils are referred to as perils in household contents insurance. Most peril insurance policies cover damage or loss caused by the following perils:

  • fire and smoke including the cost of repairs to your home, unattached buildings and personal effects
  • wind such as strong winds, tornadoes, hurricanes, thunderstorms and micro-explosions
  • hail including damage to the roof, side walls and interior of the house when wind-driven hail penetrates the structure
  • explosion caused by gas leaks, poorly installed gas lines or appliances, nearby explosions damaging your home, and explosions caused by uncovered hazards such as earthquakes or floods
  • Theft including damage to your home or other structure from a burglary, stolen or damaged personal property
  • vandalism and malicious mischief resulting in broken windows and lights, defacing your property, essentially anything done without your consent
  • falling objectsmostly trees unless deemed negligent and causing damage to a covered structure or object
  • snow, sleet or ice typically caused by the weight of the material, freeze and thaw damage, or damage caused when snow, sleet or ice is blown by the wind
  • water (excluding flooding) caused by a broken pipe, leaking water heater or other appliance, but not as a result of poor maintenance
  • power surges caused by a lightning strike or the operation of a power company
  • Civil commotion or riot causing damage to structures or personal property

What does liability insurance not cover?

While hazard insurance covers a wide range of perils, it does have limitations, Wilson notes.

“Certain natural disasters such as earthquakes, floods and hurricanes are not covered by a standard policy. So if you live in a high-risk area, consider additional flood, hurricane, or earthquake insurance.”

Other excluded hazards are:

  • Mold Damage, a fact that makes detecting mold critical during a pre-purchase inspection
  • infestation caused by termites, rats or other vermin, another point that should be uncovered by a good home inspector
  • home office including business inventory and supplies must be disclosed and separate coverage purchased or not covered
  • pets that are considered exotic or of a rare breed may require special coverage, including for liability insurance that is not part of normal hazard insurance
  • Jewelry, art or heirlooms and other high value items have limited insurance at best which means you should declare them and make sure they are fully insured
  • swimming pool generally uncovered despite being a shed or detached garage

How Much Term Insurance Do You Need?

The minimum amount of term insurance you need is set by your lender, but most experts suggest a more granular approach than simply relying on that number.

“Each lender has specific requirements about what coverage and how much coverage a buyer needs to obtain a mortgage,” says Alexander. “One of the factors is how much it would cost to rebuild the property in today’s market. Note that the amount insured may not match the amount you paid for the home, since part of the purchase price includes the property and term insurance only covers the structure.”

Bill Martin, President and CEO of Plymouth Rock Home Assurance, also emphasizes the importance of replacement costs.

“The amount of residential home coverage you need is determined by the estimated cost of rebuilding your home, not its market value,” he says. “You should have enough home insurance to rebuild your home from scratch in the event of a total loss.”

Wilson emphasizes that it’s also important to include personal property coverage in your homeowners policy, since personal property is not part of hazard insurance. “If you’re not sure what coverage you need, contact your insurance agent to help with questions while you choose the best coverage for you,” he advises.

The final result

If your lender says you need term insurance to get the loan, remember that this is part of your overall homeowners policy, not something extra. The minimum required coverage set by your lender will likely be less than the full replacement cost of building your home from scratch. Therefore, a full assessment is required to ensure you are not running out of less coverage than you should.

Finally, be aware of special perils such as hurricanes, earthquakes, or floods that may require separate coverage if they are common in the area where your home is located. Your home is probably the greatest asset you have. The security you experience with adequate coverage is worth the cost.

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