When you buy a home, you protect it with a hazard insurance policy that will reimburse you for damages caused by fire, lightning, vandalism or natural disasters such as hurricanes, hailstorms or earthquakes. Mortgage loans require that you keep hazard insurance current to protect the security you've provided for the loan -- your house.
A premium is the regular payment required to maintain insurance coverage. The premium is set at the beginning of the insurance contract, but the carrier will reserve the right to raise it in the future. The amount of the premium depends on the value of your home and includes a calculation of the risk of damage in the area where you live. Insurance premiums may be paid monthly, quarterly, semiannually or annually.
The hazard insurance premium is usually rolled into a homeowners policy, which protects you from liability claims. A mortgage company that extends the loan may consider liability coverage optional, but all will require that you have hazard insurance. To ensure the coverage won't lapse, the lender will usually require that the homeowner pay the hazard insurance premium along with the monthly principle and interest on the loan. The mortgage servicing company places the premiums in an escrow account and pays the insurance company on the premium's due date.
Insurance carriers may offer riders along with their standard hazard insurance. These optional coverages protect certain valuables in your home, such as artwork, jewelry, computer equipment, musical instruments or expensive electronics. The extra cost of the riders is included in the premium, and the insurance company reserves the right to cancel them at any time. Hazard insurance will not cover items that have their own insurance policies, such as cars or motorcycles. In addition, flood insurance must be purchased separately if you are buying in a flood zone.
For the standard risks such as fire, certain regions of the country or the city where you live may be zoned by the insurance company as particularly dangerous. This would include forest fire hazard in the western United States or vandalism in a troubled urban neighborhood. Premiums will rise under these circumstances, as they might if you have filed insurance claims in the past.
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