Property insurance is a broad range of policies that allows a policyholder to claim reimbursement for insured property, such as real estate. In the latter’s case, property insurance reimburses the policyholder (such as the property owner) in case of damage, theft, or personal liability. This compensation pays either for the value of the damage or, less commonly, for the replacement of the property.

Several subtypes of property insurance, such as homeowners insurance or flood insurance, protect the property owner.

However, some types of real estate insurance, such as mortgage insurance, instead protect lenders[1]. Borrowers pay these insurance premiums if they have a low credit score, poor equity, or cannot contribute at least 20% of the home’s down payment to offset the lender’s risk.

Types of Property Insurance

In general, any insurance that covers anybody’s possession is property insurance[2]. However, most people use it when insuring real property, which in some contexts makes it synonymous with homeowners insurance.

Home insurance policies cover any damage to the exterior and interior of the main house and what is inside it. Regular home insurance covers events like vandalism, hurricanes, lightning, and fire[3]. Losses due to theft are also part of basic coverage.

Additionally, some policyholders purchase a rider[4] to protect their property and finances from events that their policy does not cover. Separate structures like sheds and standalone garages may also need their own insurance.

For example, a condo insurance policy covers items excluded from the condominium association’s own insurance policy[5]. Meanwhile, a renter’s insurance is similar to the standard home insurance policy minus the coverage for the property itself. What sets renter’s insurance apart is that it covers not only the tenant’s personal belongings but also their living expenses when things go awry.

Separate insurance policies are also intended to cover specific types of disasters, such as flood insurance and hurricane insurance.

How Does Property Insurance Calculate Reimbursement?

Property insurance policies can calculate payouts differently depending on the insurer. Here are common ways insurance companies calculate reimbursement:

• Actual cash value policies account for depreciation and inflation. This calculation type means they determine how much the covered items cost when the claim is made and not when they were purchased.
• Replacement cost policies do not consider depreciation and inflation important. As a result, the policyholder can receive funds that match the original value of the covered items.
• Extended replacement cost policies factor in how much it will take to replace the covered items, even if it means paying the policyholder 20% to 25% higher than the limit.

More often than not, the insurance company does not provide a big enough payout to offset the insured item’s replacement cost. The policyholder usually has to pay a deductible[6], covering the gap between the insurance money and the total amount of the claim.

Property insurance best represents the adage, “It is better to have it and not need it, than need it and not have it all.” However, simply owning it can be beneficial in many ways, such as:

• Financial protection. In essence, buying an insurance policy is buying peace of mind and security. Having rainy day[7] and emergency funds[8] can help one get through tough times. However, cash reserves alone are usually inadequate to cover the cost of emergency repairs, such as an unscheduled roof replacement[9] or a whole home renovation[10].
• Transient accommodations coverage. Property insurance policies may soften the blow of dealing with surprise home repairs by covering the cost of temporary housing. The last thing anyone in this position wants to worry about is rent, so getting insured can reduce the stress of displacement.
• Manageable cost. Insurance premiums add up over time, but these annual or monthly payments are predictable. However, the same cannot be said about the events property insurance covers. If one is caught unprepared, they may be forced to take out a loan with steep interest and without any guarantee of getting approved.
• Increased chance of mortgage application success. Being uninsured does not automatically mean mortgage denial[11], but it is difficult to finance a home purchase without agreeing to get an insurance policy. Most institutional mortgage lenders will not agree to such a risk.

BY THE NUMBERS: In the United States, the average cost of home insurance premiums is $140 per month or $1,680 per year.

Source: ValuePenguin

U.S. laws do not require buying a home insurance policy when purchasing property[12]. However, there is a significant risk in not having any insurance in the event that the worst happens to a person’s home or personal belongings. After all, replacing damaged or lost possessions at the drop of a hat is out of reach for many working Americans.

For example, storm damage can create unhealthy living conditions[13]. Worse, putting off the necessary repairs due to lack of funds will only compound the problem.

Relying on credit to fund a renovation is an option, but acquiring a massive debt can be a financial burden. One missed payment can snowball into a noticeable decrease in credit scores, leading to few (if any) favorable credit opportunities in the future.

Apart from mortgage lenders, landlords also require landlord’s insurance[14]. These policies help cover the cost of damage to the property due to tenants. They also shield the landlord from personal liability, such as when someone injures themselves while on the landlord’s property. Oklahoma is the only state that does not allow landlords to use it as a lease condition[15].

BY THE NUMBERS: The average cost of storm damage repairs is about $9,800.

Source: Angi

• Property insurance pays for the cost of repairing or replacing one’s belongings when damaged or stolen. This type of insurance can also financially protect one from lawsuits and pay for temporary housing.
• In real estate, the most common types of property insurance are homeowners insurance, renter’s insurance, and condo insurance.
• Most insurance policies protect property owners, but mortgage insurance protects lenders from borrowers with poor credit or equity. In addition, almost all states except Oklahoma require landlord’s insurance that tenants need to pay.
• No U.S. law mandates property insurance, but getting an insurance policy is necessary when taking out a mortgage, renting a house, and protecting one’s finances.

1. Consumer Financial Protection Bureau. (2020.) What is mortgage insurance and how does it work? Retrieved from https://www.consumerfinance.gov/ask-cfpb/what-is-mortgage-insurance-and-how-does-it-work-en-1953/
2. State of South Carolina Department of Insurance. (n.d.) Understanding Your Insurance Policy. Retrieved from https://www.doi.sc.gov/957/Understanding-Your-Insurance-Policy
3. Lee, R. (2020.) An insurance peril is an event that causes damage to your home, and your coverage depends on what policy you have. Business Insider. Retrieved from https://www.businessinsider.com/personal-finance/what-is-home-insurance-peril
4. Money. (2021.) What Are Insurance Riders? Retrieved from https://money.com/what-are-insurance-riders/
5. ABM Insurance. (2022.) The Difference Between an Individual Condo Insurance Policy and a Master Insurance Policy. Retrieved from https://www.abminsurance.com/the-difference-between-an-individual-condo-insurance-policy-and-a-master-insurance-policy/
6. Corporate Finance Institute. (2020.) What is Insurance Deductible? Retrieved from https://corporatefinanceinstitute.com/resources/knowledge/other/insurance-deductible/
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9. Graham, A. (2021.) How Much Does It Cost to Replace or Install the Roof of a House? Fixr. Retrieved from https://www.fixr.com/costs/roof-replacement
10. Grupa, T. (2021.) How much does it cost to remodel or renovate a house? HomeGuide. Retrieved from https://homeguide.com/costs/house-remodeling-cost
11. Fontinelle, A. (2021.) Mortgage Application Denied? Here’s What To Do. Forbes Advisor. Retrieved from https://www.forbes.com/advisor/mortgages/mortgage-application-denied/
12. Insurance Information Institute. (n.d.) Can I own a home without homeowners insurance? Retrieved from https://www.iii.org/article/can-i-own-home-without-homeowners-insurance/
13. Sreenivas, S. (2021.) Health Risks After a Hurricane. WebMD. Retrieved from https://www.webmd.com/a-to-z-guides/health-risks-after-hurricane
14. Allstate. (2018.) What Does Landlord Insurance Cover? Retrieved from https://www.allstate.com/tr/landlord-insurance/what-is-landlord-insurance.aspx
15. Smith, E. (n.d.) Can My Landlord Require Renters Insurance? Hippo. Retrieved from https://www.hippo.com/blog/can-landlords-require-renters-insurance