What Is Hazard Insurance on a Mortgage?

Your home is your castle. It's where you raise children, relax after a hard day's work and read the newspaper while Fido lays happily at your feet. If your house burns down, gets hit by a falling tree or is burglarized, repair expenses can be overwhelming. Lenders know this and therefore require you to carry hazard insurance for the life of the loan.

What It Covers

Hazard insurance, often purchased as an extension of basic homeowners insurance, covers the structure of the home as well as its contents if a covered event happens. Many hazard insurance policies also cover personal liability in case someone is injured in an accident on your property.

Requirements

Lenders will not only require you to obtain hazard insurance but also will require you to pay the first premium at closing. Many lenders require the first year's premium at closing, out of which the first month's premium is paid and the rest is place in an escrow account. For each subsequent month, the hazard insurance premium is paid from the escrow account.

Hazard Insurance vs. Mortgage Insurance

Hazard insurance is not the same as mortgage insurance. Hazard insurance pays for property damage, medical expenses for accidents on the property, repair to the structure and any additional living expenses if you are displaced by a covered event. A mortgage insurance plan, however, protects the lender. It is designed to take care of the mortgage should you default on the payments.

How Much You Should Have

The amount of hazard insurance coverage you buy will depend on the value of your house and contents. Your lender will require at least enough to totally rebuild the home in the event it is destroyed. You'll want to add coverage to include personal items, such as clothing, televisions and other things that contribute to your daily life. Your insurance agent can help you determine the replacement value of your belongings and how much personal liability coverage you need in addition to the replacement cost of the building.

Where to Get It

Your lender might recommend an agent; however, you can get your policy from the insurance company of your choice, as long as the policy's minimum coverages meet or exceed the lender's requirement.

About the Author

Candace Webb has been writing professionally since 1989. She has worked as a full-time journalist as well as contributed to metropolitan newspapers including the "Tennessean." She has also worked on staff as an associate editor at the "Nashville Parent" magazine. Webb holds a Bachelor of Arts in journalism with a minor in business from San Jose State University.