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Mortgage lenders often require a certain amount of hazard insurance before you can buy a home or close on a refinance.
Hazard insurance may be part of your standard homeowners insurance policy, or your lender may require you to buy additional hazard insurance — if, for example, you live in an area prone to natural disasters like tornadoes.
Here’s what to know about hazard insurance:
- What is hazard insurance?
- What does hazard insurance cover?
- How does hazard insurance work?
- What does hazard insurance not cover?
- Is hazard insurance the same as homeowners insurance?
- How much is hazard insurance?
- How much hazard insurance do you need?
- Is hazard insurance required?
- How to get hazard insurance
What is hazard insurance?
Hazard insurance protects your home’s structure from covered perils — both natural and man-made — like fire, hail, theft, or vandalism. If your house is damaged by one of these events, hazard insurance will cover the costs to repair or replace it — up to your coverage limits. Mortgage lenders typically require homebuyers to purchase hazard insurance to protect their investment.
Besides covering your home itself, hazard insurance may also protect against structural damage to your property’s attached and detached structures, including garages, gazebos, barns, sheds, and pool houses. Detached structures like gazebos and fences are called “other structures” and fall under Coverage B on your home insurance policy. Your house, or dwelling, falls under Coverage A on your policy.
To be clear: Hazard insurance is not a separate type of policy you can buy outright. It’s actually a part of your larger homeowners insurance coverage. We’ll go more into the differences between these two terms later on.
What does hazard insurance cover?
Hazard insurance only covers your home’s structure, so if a storm, natural disaster, or certain man-made event damages your property.
Typically, you can expect hazard insurance to cover property damage from events like:
- Fire
- Hail
- Lightning
- Theft
- Vandalism
- Fallen trees
- Explosions
- Cars hitting your house
- Electrical surges
- Freezes
- Pipes bursting
- Smoke damage
- Wind
As a rule, these perils must be sudden and accidental for your policy to kick in. For example, if water damage stems from a roof leak you didn’t fix 10 months ago, you can’t claim them on your insurance today.
How does hazard insurance work?
Hazard insurance works just like any other type of insurance. You pay a deductible, and your insurer covers the remainder of the cost (up to your limits).
Here’s an easy breakdown of how hazard insurance works: Let’s say that your hazard insurance covers your property up to $100,000 and includes a $5,000 deductible. Many policies use a percentage instead of a dollar value. So, in this case, your deductible is 5%.
A windstorm knocks a tree down, which crashes through your roof and destroys part of your house. The total cost to rebuild is $25,000. Based on your deductible, you must pay $5,000, and your insurance company will pay the remaining $20,000.
Check Out: Homeowners Insurance Deductible: What You Need to Know
What does hazard insurance not cover?
Since hazard insurance covers the structure of your house only, it won’t cover things like liability, injuries to you or your guests, or damage to/theft of your personal belongings.
Here’s a look at some items that wouldn’t fall under your hazard insurance coverage:
- Liability
- Injury or medical bills due to injury on your property
- Damage or theft of personal belongings
- Lodging, if an event displaces you
- Floods (other than ones due to a burst pipe or plumbing issue)
- Earthquakes
Your general homeowners policy may cover many of these items, though you can customize how much coverage you want. You can also add on coverage to protect your property from floods and earthquakes if those events are common in your area. In fact, your lender might even require earthquake or flood insurance before you can close.
Is hazard insurance the same as homeowners insurance?
Hazard insurance and homeowners insurance are often used interchangeably, but really, hazard insurance is just one part of your home insurance policy.
While hazard insurance covers the structure of your home — the walls, roofs, floors, foundations, ceilings, and built-ins like kitchen cabinets and plumbing — your larger homeowners policy covers the rest, including things like general liability or theft of your possessions.
Hazard insurance vs. home insurance
The following table compares hazard insurance and homeowners insurance:
| Hazard insurance | Home insurance |
|---|---|
| Only protects your home’s structure | Offers a wider array of protections, including liability, personal property, and loss of use |
| Required by mortgage lenders | Mortgage lenders only require the structural coverage |
| Does not cover floods or earthquakes | Does not cover floods or earthquakes |
| Is part of your larger homeowners insurance policy | Is your main insurance policy |
How much is hazard insurance?
The cost of hazard insurance depends on many factors, including your home’s value, where it’s located, your policy limits, your deductible, and your credit score. Older homes may cost more to cover than new ones, as will properties in high-risk areas, like those more prone to storms or flooding.
Because so many variables affect the cost of homeowners insurance, it’s difficult to pin down a single average amount. But here are the national averages for HO-3 policies (the most common type) by amount of insurance, according to a National Association of Insurance Commissioners report:
| Amount of insurance | Average premium |
|---|---|
| <$49,999 | $648 |
| $50,000 - $74,999 | $757 |
| $75,000 - $99,999 | $825 |
| $100,000 - $124,999 | $882 |
| $125,000 - $149,999 | $930 |
| $150,000 - $174,999 | $975 |
| $175,000 - $199,999 | $1,012 |
| $200,000-$299,999 | $1,113 |
| $300,000 - $399,999 | $1,278 |
| $400,000 - $499,999 | $1,492 |
| $500,000+ | $2,163 |
How much hazard insurance do you need?
Your lender will likely set a minimum required amount, and may even require you to buy additional types of coverage if you live in an area prone to certain natural disasters. If you’re currently buying or refinancing a home, ask your loan officer how much you’ll need so you can begin shopping around early.
Your budget and how much you have in emergency savings should also play a role in how much insurance coverage you purchase. And you should also keep in mind that your lender will only have a minimum requirement. You can certainly exceed this and purchase additional hazard coverage to protect your investment. This might be a good idea if you’re in an area with particularly harsh weather.
If you host a lot of guests, personal umbrella coverage to extend your existing limits may also be necessary. Be sure to talk to your insurance agent about any additional risks you may face to ensure you get the most comprehensive coverage possible.
Is hazard insurance required?
If you have a mortgage, then yes, hazard insurance is a requirement. Mortgage lenders want to minimize their risk as much as possible, so hazard insurance protects their investment until you pay off the loan.
Technically, once you’ve finished paying the mortgage, you’re no longer required to have hazard insurance on your property. If you bought your home in cash, hazard insurance is also optional.
If hazard insurance will strain your budget, you might consider taking out a high-deductible policy. This would at least protect your home in case of extremely costly events — though you’d still need to pay your fair share out of pocket. You might also consider an actual cash value policy rather than a full replacement cost one. These typically come with lower premiums.
Is hazard insurance tax deductible?
You’ve probably heard that mortgage insurance is tax-deductible, as are property taxes and mortgage interest. So does hazard insurance fall under that umbrella too?
Unfortunately not. Hazard insurance is part of homeowners insurance, which is considered a personal expense and can’t be deducted from your annual tax burden. The only exception is on insurance bought for rental properties.
How to get hazard insurance
To get hazard insurance, you’ll want to shop around with several insurance companies first. This ensures you’re getting the best rate and service.
To get your policy, you should:
- Use Credible to get rate quotes and compare insurers. You’ll need to provide some information about yourself and the house you’re purchasing or refinancing.
- Choose your insurer. Consider the premium cost, and check out reviews and ratings too.
- Add on any additional coverages. If you live in a flood- or earthquake-prone area, consider adding policies to protect you from these events.
- Pay your premium. You may get a discount for paying upfront and in full. You might also choose to pay monthly or through an escrow account.
- Give your mortgage company your proof of coverage. They’ll require it before you can close on your loan.
Remember: Hazard insurance will come as part of your larger homeowners insurance policy, so take your time to choose the right coverages. You may also want to speak to a live insurance agent to discuss your budget or anything unique about your home or location. These could all influence the type and amount of insurance you’ll need to secure for your home.
