Many homeowners may be surprised to find out that home insurance is not generally required by state or federal law. Although law may not demand you carry insurance does not mean you should go without, however.
There are some cases in which you will be required to carry home insurance—such as if you have a mortgage on your home. If you have a loan on your home, banks have the right to require you to carry home insurance.
Insuring Your Home’s Mortgage
In many cases, you will be required to carry home insurance so long as you have a mortgage on your home. Banks generally require you to carry just enough home insurance to cover the mortgage of your home in case of an accident or disaster. This is so they can protect their interest in the home.
This also means that you may not need to carry home insurance after you pay off your home. Once your home is no longer owned by the bank, they no longer have a set requirement regarding your home insurance.
When Should You Drop Home Insurance Coverage?
Although you can technically drop home insurance after you have paid off your home’s mortgage, this is not recommended. Without home insurance, you will have to face expenses related to accidents, lawsuits and disasters all out of pocket.
It is generally recommended that homeowners (whether their mortgage is paid or not) carry enough home insurance to cover at least 80% of their home’s total replacement cost value. The total replacement cost value of your home is how much it would cost to completely rebuild the home after a disaster, including building and material costs. Carrying less than 80% of this value can leave gaps in your home insurance coverage that could lead to you not receiving enough compensation for a claim.
Before changing or cancelling your home insurance policy, be sure to speak with your insurance agent and those in your household. Home insurance isn’t only useful for the physical home, after all, as it also covers your personal belongings in case of loss or damage due to fire, wind, hail, lightning, smoke, theft, vandalism and more. Another part of home insurance is personal general liability, which compensates for accidents if someone is injured or their property is damaged on your home. This includes victim’s medical bills and property repair as well as legal fees you may face in case of a lawsuit.