Home hazard insurance is necessary when you purchase a new home and require a mortgage loan. The IRS insists that you obtain coverage for an “average risk” policy in any case. You can deduct a percentage of your home hazard insurance costs when you’re a sole proprietor who files a separate Schedule C (Loss or Property Loss) and… when you’re in a Rent-A-Car Program?
If your lender provides you with a car title loan, the lender is also covered by home hazard insurance as long as you keep the car at least one year or more in the same building as your mortgage. If you have a Mortgage lien or a Mortgage Trust Deed, or both, the lender is fully protected. The IRS considers both as secured indebtedness. What if a fire were to break out in your home and damage all of your valued property? Your lender would have to file a claim with the Insurance Department, which would be reflected on your final IRS return. This claim could then be distributed to the remaining principal balance on your Mortgage.
The mortgage company may then foreclose on your home and sell your mortgage note, which is its capitalized value. If you don’t have home hazard insurance, your lender will be forced to foreclose on your mortgage and may be subjected to stiff fines. Even if they can afford to keep you on the hook for your mortgage note, they’d rather get their capital quickly than having to take on a legal liability associated with a fire or other loss that could cause them to lose the entire investment they made on your mortgage. So they’ll often settle for less money than the note is worth in a short sale situation.
So it’s really important to understand the different types of homeowner’s insurance coverage. They’re categorized according to their risk factor. Risk factors are things that can cause you to be sued by your mortgage lender or forced into a foreclosure. For example, if you have a power plant that causes a leak and damages some items inside your home, there is a risk of harm to you and your family. But not all loss situations fall under this category; sometimes damage due to natural disasters are not considered a loss. These situations are classified as either “force-placed insurance” or “life-insured insurance”.
“Force-placed insurance” is basically the same as “life-insured insurance” but only deals with events that have occurred within the lender’s property. For example, if a customer in your home trips and falls on the sidewalk, your mortgage lender will probably be covered by the insurance. This doesn’t cover you for injuries that happen outside your home. In many cases, the force-placed coverage lapses after a certain amount of time because the incident isn’t considered to have occurred within the lender’s property. Life-insured coverage has an expiry date that usually coincides with the life cycle of the mortgage. So generally speaking, the longer your home has been on the market, the longer the expiry date is.
So if the life insurance coverage has lapsed or it’s not a good idea to buy homeowner’s insurance coverage, what is an alternative? There are times when homeowners are not at fault and there is no reason to file a claim, but if something does happen and it’s your fault, you need to be sure that you and your home are covered adequately. Homeowner’s insurance coverage comes in two different types: actual cash value (ACV) and replacement cost coverage (RCV). Each of these has its own respective advantages and disadvantages.
The most popular type of homeowners insurance in North America is ACV. Most insurance companies include this in a standard homeowner’s package along with mortgage interest. With this type of coverage, if your home is damaged or destroyed during a fire, and you’re underinsured, the lender will cover the difference. If you do not have a mortgage and your home is damaged, the insurance company will pay you for the cost of repair minus the amount by which your home is more than the amount you owe on it. However, even if the damage was caused by a fire or flood, this type of coverage lapses if the damage occurred prior to purchase.
The second type of coverage is replacement cost. This form of homeowners’ insurance premiums is designed to reimburse you for the costs of repairing or replacing your home if it is destroyed in a fire or flood. You may also be reimbursed for damage done to your property due to vandalism or theft.