Simply put, homeowners insurance provides financial protection to help replace your home's physical structure and contents in the event of a covered peril. In contrast, mortgage insurance offers a safety net to your lender to guarantee they receive mortgage payments even if you stop paying. Let's break it all down.
Think of homeowners insurance as a policy covering the physical value of your home and its contents, similar to car insurance. A typical homeowners insurance policy provides you, as the owner, a financial benefit to repair damage or replace loss, from events ranging from a fire destroying an entire home and its contents, to a thief stealing significant electronics.
A homeowners insurance policy isn't limited to the main dwelling; it often covers your entire property, potentially including fencing, sheds, and outbuildings.
Along with the physical, homeowners insurance offers a level of liability insurance to help pay for any lawsuits from a non-resident injured on your property, such as in a trip-and-fall scenario.
Paying for homeowners insurance
Mortgage lenders commonly require you to purchase homeowners insurance, in part to help protect their interest in your property, so you don't abandon a badly damaged home and stop paying your mortgage. Still, it's up to the homeowner to secure a policy and pay the monthly premium. The cost of a homeowners insurance policy will be based on the value of the home and the level of coverage on its contents.
Who benefits from homeowners insurance?
The beneficiary of a homeowners insurance policy is you, the owner. In the case of damage or theft, you'll be paid for the loss, minus any deductible included in your policy, and you can use those funds to rebuild or replace. For this reason, even after a mortgage is paid off, homeowners commonly continue their homeowners insurance policies.
Limitations of homeowners insurance
Know the policy you've chosen. You select your coverage limits and deductibles when you purchase your policy. If your home has increased in value over the years, you may need to increase the coverage limits on your policy. Plus, specific emergencies, such as earthquakes and floods, may require a unique addition to your policy that doesn't come with standard coverage.
A homeowners insurance policy doesn't protect your mortgage payments; it simply covers your physical property.
Mortgage insurance, sometimes dubbed private mortgage insurance or PMI, covers just one thing: your mortgage payments. Sometimes a requirement is placed on your loan by your lender; mortgage insurance guarantees your lender receives the full balance of the loan if you defaulted on the loan for any reason.
Paying for mortgage insurance
The cost of your mortgage insurance is directly tied to the mortgage level when the policy is purchased. The greater the loan risk — such as with a small down payment — the likelier a lender will require you to purchase mortgage insurance as a condition for lending you money. Every lender will have different rules for how long you must carry mortgage insurance, so if you're in this situation, look carefully at your loan obligations.
Who benefits from mortgage insurance?
Mortgage insurance aids your lender, and only your lender. The policy's beneficiary is the lender, with any payout amounts going directly to cover the remaining balance on a mortgage.
Limitations of mortgage insurance
While mortgage insurance does guarantee that if something were to happen to you and you were no longer able to pay your mortgage, the lender would recoup their costs, this type of insurance provides no benefit to you, the homeowner.
If you're responsible for paying a mortgage on your family home, having a life insurance policy for yourself may provide coverage for gaps in your other insurance.
Homeowners insurance does nothing to help with mortgage payments if you pass away. If you have a mortgage insurance policy, it doesn't provide any financial benefit to your family.
A term life insurance policy provides greater flexibility than mortgage insurance, allowing you to choose your beneficiary, the amount of coverage, and the length of the policy term.
Term life insurance provides coverage for a set period, referred to as the "term," and it's designed to protect your dependents throughout the term of your policy. Term life insurance can be used to cover a wide range of debts and expenses, including your mortgage, but also lost income, future college tuition for your children, medical bills, living expenses, and plenty more.
Looking for online life insurance? Get a quote today. Our life insurance guide shows you how a term life insurance plan through Ethos can help cover your home insurance gaps.