Consumers hear about the most popular types of insurance regularly, such as auto, life, health, and homeowners insurance. The largest companies spend billions advertising and inundating Americans with constant reminders that they need to switch insurance carriers, get quotes to find cheaper rates, or buy more coverage. For a change, let’s talk about a few other types of insurance that may not be mentioned as often, but are equally important and essential to protecting your largest asset: your home.
When you learn that title insurance companies pay out less than 10 cents in claims out of every dollar they collect in premiums, as a homeowner, you are inclined to think that you ought to stop whatever you’re doing and become a title insurer yourself, whatever it is title insurers do. After all, the house take in Vegas does not approach 90 cents out of a dollar. If it did, gamblers wouldn’t return.
What Is Title Insurance?
Homeowners are now obviously asking themselves, should I buy title insurance on my newly acquired rental properties or homes? Why does title insurance pay out so little? And what is title insurance anyway?
First, title insurance protects buyers against other people’s claims to a property which might result from any number of unexpected occurrences, such as forgeries, mistaken identical names, and undisclosed heirs. Title insurance guarantees that nothing out of a property’s past will catch up with you and deny you ownership of your home, now or in the future. It guarantees that you have a clear title, and that you own the property free and clear.
Title insurance companies pay out so little in claims because they go to great lengths to discover problems with the title, and these protective measures are included in the price of the policy. If fire insurance companies operated similarly, they’d install an automatic sprinkler system in every building they cover and include the cost of the system in the price of the policy.
As to whether you should buy title insurance or not, you may not have much of a choice. Institutional lenders, such as the largest national banks including Wells Fargo, Bank of America, JP Morgan Chase, Citibank, and regional or community banks, require you to buy enough title insurance to cover their loan. But the policy they require is strictly a lender’s policy, not a buyer’s policy. It’s like the mortgage insurance which some lenders require borrowers to buy to protect the lenders. It doesn’t pay the homeowner off. It does benefit you somewhat, however, because it pays for the insurer’s exhaustive title search. Consequently, the buyer’s title insurance premium, which you may choose to buy or not, is less expensive than it would otherwise be.
Buy A Title Insurance Policy
When you’re trying to decide whether to buy a buyer’s title insurance policy, you should remember that you pay for it only once, when you buy a home, and then both you and your heirs are covered for as long as you or they own the property. You never pay another premium after that.
Whatever you do, don’t purchase any property without having someone search the title at the very least, even if no lender is involved and you’re paying for it in cash. A title search is an absolute must. It could reveal mechanics’ liens, attachments, and old loans which the owner told you nothing about and could trouble you for years to come.
Two completely different types of insurance coverage have come to be known as “mortgage insurance” or PMI. The object of both types is the same, to pay of the balance of the outstanding mortgage when trouble strikes, but the beneficiaries are definitely different.
Mortgage Protection Insurance
The first type benefits the homeowner. It’s pretty much the same as decreasing term life insurance (get term life insurance quotes), the decreasing sum being the mortgage balance. It’s especially popular with homeowners because they want to protect themselves in case death or disability puts an end to some or all of their income used to make mortgage payments. The mortgage would then be paid off in full. Such mortgage insurance is available to cover rental property mortgages as well, and it may be just as important for some rental property owners to have, especially when a rental property is running a negative cash flow and one person is contributing income from a job to support it.
When determining whether you should get this mortgage insurance coverage, consider both the salary and the time contributions of each person involved with the property because you may find that hired help would be needed to compensate for the work done by one of those people involved, and that, of course, would increase the negative cash flow still more. If you do choose to buy this kind of mortgage insurance for your income property, consult your tax adviser for advice on whether it is tax-deductible as a business expense in your situation.
Mortgage Indemnity Insurance
The other type of mortgage insurance will pay off the mortgage too, but it won’t benefit you as the property owner in the least. It protects your mortgage lender or bank should you default on the mortgage and the property is sold at auction for less than the balance owed. The mortgage insurance policy would pay the lender the difference between the two. This kind of mortgage insurance coverage is also offered in FHA and conventional loans purchased by Fannie Mae and Freddie Mac. Fannie Mae and Freddie Mac purchase mortgages from lending and banking institutions to create a secondary market and provide more capital for banks to lend. As a new home buyer, you will have to pay mortgage insurance if you don’t put a minimum down payment of 20%. Once homeowners have achieved 20% equity in their investment, they will not need to pay mortgage insurance any more.
Although your lender may require that you pay the premium on such an insurance policy, don’t suppose that you’re getting the same coverage as the other kind of mortgage insurance. You are not. When the first type pays off, you or your beneficiaries wind up with assistance in making your loan payments or with a property that is free and clear of all debts. When the second one pays off, neither you nor your heirs get any money. The lender gets the policy’s proceeds.
Even into the ‘70s, not every rental property owner bothered to obtain liability coverage because few people filed liability claims and even fewer collected. Today, that’s all changed – you can’t afford to be without liability insurance any more than doctors can afford to be without malpractice insurance. You are expected to be the perfect landlord and to supply the perfect rental property. That’s quite a burden to bear, an impossible burden for any individual businessman or businesswoman.
Both the number of liability cases and the types of cases have increased, as have the awards. It’s not just the personal injury case caused by your supposed negligence that you have to worry about nowadays. It’s the discrimination case, the wrongful eviction case, the invasion-of-privacy case, the crime-on-your-property case, the strict liability case, the failure-to-maintain case, the failure-to-keep-me-happy case, etc. Those are ever present worries for a landlord or property owner.
The worries keep growing, too. In regards to “strict liability”, courts have been ruling that tenants only have to prove that your “product” or home was defective and that as a result of the defect or failure to maintain an inhabitable area, they were hurt. They do not have to prove that you were negligent in the least. This policy of strict liability has been applied to manufactured products for some years here in the United States. It has caused some companies to go out of business entirely and others to stop making certain products or offer services.
Don’t go the self-insurance route for this risk. Buy liability insurance which will cover every liability you can think of, and while you’re at it, buy enough. Buy the highest limits you can afford or make financial sense for you, or add to your liability policy’s limits with an umbrella policy. You will find that a million dollar’s worth of coverage costs little more than a hundred thousand dollars’ worth, and it could save you from the poorhouse, for the rewards people manage to get in liability cases, especially when they involve a personal injury. Expect your liability premiums to become a more noticeable expense than they have been in the past. Complain all you want to about the rising insurance rates, but don’t neglect paying them, especially if $1,000 in premiums can save you from bankruptcy in the future.
Umbrella insurance coverage, which is also known as blanket or excess insurance, keeps covering us when we reach the limits of our other liability policies. Those other policies cost more per dollar of coverage than an umbrella policy does because they pay off more often. Car, home, health, and life insurance pay the smaller claims. Umbrella policies pay only the larger claims and only the higher amounts of the larger claims. On a $465,000 claim, for example, the primary home insurance policy may pay the first $100,000, and the umbrella policy might pay the rest of the $365,000.
Investigate the possibility of keeping the limits of your individual liability policies around $300,000 for each property or home, and then buying an umbrella policy for $300,000 to a million or more. That will be less expensive than buying individual policies for a $1,000,000 or more each.
To be most effective, your umbrella policy should leave no gaps between the upper limits of your various primary liability policies and the lower limit of the umbrella insurance policy. The insurance coverage should also cover you for at least double the value of your personal assets.
Buy umbrella coverage from the same insurance company which underwrites most of your primary liability policies, and you’ll avoid potential squabbling between two insurance companies which have different ideas for settling a single lawsuit. Also, buying auto, health, life, and home insurance coverage from the same top rated insurance companies can help lower administrative costs and provide you cheaper insurance rates altogether
If you are covered for the peril of earthquake in California, the law requires that your insurer also offer you a minimum of $1,500 in loss of use benefits, specifically for additional living expenses, in the event your home becomes uninhabitable because of the earthquake. Since there is an ongoing challenge by the major insurance carriers in regard to requirements for earthquake insurance, you would be wise, if you live in areas subject to this kind of loss, to check your policy for the minimum amounts your home insurance company will pay.
In 1996, legislative developments in the State of California created the California Earthquake Authority (CEA). This plan, underwritten by California taxpayers, has established a $10.6 billion state-managed earthquake insurance program. This program is akin to the federal government sponsored flood insurance coverage program offered in flood potential communities.
Earthquake insurance coverage has always created a number of proponents, detractors and problems, and this new program is no exception. Premium rates will vary throughout the state based on the high risk of earthquake prone areas (i.e. San Fernando Valley, San Francisco, etc). The major home insurance companies have also negotiated an exit clause in the agreement which allows them to drop coverage altogether should the program prove unsuccessful.
Under homeowner policies, flood, overflow of streams and other bodies of water, tidal waters, waves, spray and a wide variety of other water-associated damages are excluded from any coverage whatsoever. Until 1968, virtually no flood insurance of any kind was generally available. Finally, the federal government, through the National Flood Insurance Program, stepped in with a subsidized program offering limited amounts of flood insurance in certain areas through select insurance companies.
The National Flood Insurance Program, administered by the Federal Emergency Management Agency (FEMA), currently offers flood insurance through the federal government and 85 private insurers. To qualify, homeowners must live in one of the 18,300 flood-prone communities that have taken specific steps to control floods. Rates vary according to the structure of the house and its vulnerabilities.
Please note that homeowners waiting for a “flood alert” before getting insurance from the National Flood Insurance Program administered by FEMA will encounter a five-day waiting period between the time of purchase of the policy to the time the coverage becomes effective, so don’t wait till the last minute to buy protection.