Property insurance is necessary whether you buy real estate for residential, commercial, or investment purposes. What is the nature of property insurance, and what should you understand when obtaining this protection? In this article, let's examine these—and other—questions about property insurance.
The basic concept behind property insurance is that a large group pays monthly premiums. Any disaster occurring to a smaller portion of the group can be financially supported to help pay for what insurance companies call a "covered peril."
It's necessary to have property insurance for these reasons:
There are various types of property insurance coverage that you should consider. The appropriate coverage for your circumstances depends on whether you are an owner, investor, builder, or tenant.
This insurance is for residential properties, which are usually owner-occupied. It covers standard damage to the home from fires, burglaries, and vandalism. It can also cover personal belongings (subject to limits) and liability if someone is hurt while on your property.
This insurance covers renters' personal belongings kept in the rental unit and may offer some protection if somebody is hurt while in your rented space.
For real estate investors who rent out their properties, landlord insurance is a type of commercial policy that covers the structure itself and any other property owned by the landlord (like appliances) used by renters. It may provide liability coverage if a tenant or visitor gets hurt in common areas.
This insurance covers your unit's interior (walls in), while the condo association or building owner handles the insurance for the building structure and common areas.
Most standard property insurance policies don't cover flood damage, so if you're in a flood-prone area, you'd need a separate flood insurance policy.
Wind damage may result from high winds, such as those experienced in a tornado or a hurricane. Most insurance policies cover wind damage.
Most regular policies don't cover earthquake damage, so you need a separate policy if you live in an earthquake-prone area.
There is a significant difference between homeowners insurance and commercial insurance. Most homeowners insurance requires the homeowner or an immediate family member to occupy the property. If the property is used for a commercial purpose, which includes renting it to others, a claim for a covered peril, such as a fire, may be denied if you have a homeowners policy but do not live there.
To evaluate whether you have this problem, read the terms and conditions of your policy. Carefully consider any stated exclusions. Get the advice of a qualified financial professional if you have concerns and do not understand what is said in your insurance policy.
Here's why this is critically important. Suppose you rent out your house and do not have commercial insurance. If a renter causes a fire, your insurance claim may be denied under a regular homeowners policy because you do not live there.
It is wise to conduct an insurance review each year and after any substantial change in your circumstances. A trusted insurance agent could help you with this process as long as you recognize the solutions offered may be biased in ways that make the agent money. You can also hire a financial professional to conduct an insurance review and get an opinion that is not tied to money considerations.
Here are some types of homeowners insurance coverage:
Commercial insurance is a necessity for any business. You might need commercial insurance if any part of a property is used for business activities.
Suppose you have a home office and clients occasionally stop by for meetings. This use of your home is a commercial activity, which standard homeowners insurance may not cover. Similarly, you may need commercial insurance if you rent out the property, even only a portion of it.
Here are some types of commercial insurance coverage:
To find the appropriate coverage for a piece of real estate, it's important to understand the types of coverage available and the exact amount of the deductible and premiums you'll need to pay. Other steps to getting the best insurance include the following.
It would be impractical to buy too much insurance. More insurance costs, and if you don't need it, you shouldn't have to pay the premiums. The coverage needed typically depends on the property you want to insure, location, age, construction materials used to build it, and whether the building standards are up to code.
Paying premiums is only worthwhile if your insurance company cooperates and pays you what is required under your policy terms when you have a legitimate claim for a covered peril. This requires finding a trustworthy insurance company.
To find such a company, ask for referrals from friends, relatives, and colleagues. Conduct due diligence on any insurance companies under consideration by doing the following:
Do your best to compare "apples with apples" by getting multiple quotes from reputable firms for similar coverage. Don't assume you have coverage or that a policy includes it. Carefully read and evaluate the insurance policy terms and conditions.
Set your deductible level high enough to save money on insurance premiums but low enough to be able to pay it if needed. A clever strategy is to set a high deductible and then place that amount of money in a long-term certificate of deposit.
Another way to save on premiums is by bundling insurance coverage (for example, using the same company for your auto and home insurance). Also ask for additional savings that might apply, like veteran or first-responder discounts.
There are places and types of properties where it is difficult, if not impossible, to get property insurance. For example, insuring a beach house in Florida is becoming increasingly difficult and more expensive. Depending on other claims in the area, be aware that your existing insurance policy may be canceled or not renewed. In this case, the state in which your property is located may offer the only available insurance with expensive premium rates and extremely high deductibles.
Mortgage lenders require real estate to be insured when it is used as collateral for a loan. In some states, if you fail to carry homeowners insurance, a lender can force coverage and charge you for that coverage. The insurance obtained through forced coverage only protects the lender for the outstanding balance on the mortgage and nothing else.
Insurance is a necessary property expense. Be sure to do your research and understand your coverage. If your real estate portfolio is extensive, work with a financial professional to conduct a risk analysis/insurance review. PropertyReach provides the data needed to find comparable properties (comps) and other information used to estimate property values, which can help you determine the right amount of insurance coverage needed. For more information, visit propertyreach.com and sign up for a seven-day trial.