Although many homeowners are familiar with the concept of homeowners insurance, the term "hazard insurance" may seem slightly more foreign. After all, the concept of a "hazard" requires careful definition, particularly in the context of an insurance policy. Generally speaking, hazard insurance acts as a financial safety net, protecting homeowners against damage caused by serious natural events such as fires, tornadoes and other adverse conditions. Although hazard insurance is not required by law, it can be hugely beneficial for individuals who live in areas where potentially catastrophic natural events may occur.
Hazard insurance is a valuable form of supplemental insurance that can support existing insurance coverage. The price of hazard insurance premiums will generally increase as the value of the property involved increases.
The Basics of Hazard Insurance
Hazard insurance acts as a supplement to homeowners insurance. Although standard homeowners insurance policies will cover a variety of adverse scenarios, hazard insurance expands this coverage and ensures that your property will be protected in virtually any "worst-case" scenario.
It is often the case that a homeowners insurance policy will exclude a specific type of threat if the area is particularly prone to its occurrence. For example, homeowners living along the coastline within the Gulf of Mexico will typically not be able to protect against damage from hurricanes in their homeowners insurance policy. Because the likelihood of such an event occurring is so great, the providers of home insurance policies in this area cannot afford the financial risk of covering this damage.
Instead, homeowners will be offered a chance to pay an additional premium and obtain hazard insurance. In some situations, mortgage lenders may refuse to offer financing to new homeowners if they do not supplement their home insurance policy with specific hazard insurance coverage. Given the fact that hazard insurance costs a fraction of the amount that damages to a property would be worth, it is always in the best interest of a homeowner to add on this coverage if possible.
Hazard Insurance Policies
As a general rule, hazard insurance providers will price their policies based on the amount of money it would cost to completely replace your property in the event of catastrophic damage. Therefore, hazard insurance premiums are likely to increase as the value of a property increases. This does not mean to imply that the policy will cost the same amount as the house. Instead, homeowners can expect to budget a larger amount of funds for their hazard policy if they are living in a relatively expensive home.
Generally speaking, hazard insurance policies are designed as one-year, renewable policies. Although exceptions are certain to exist, this is by far the most common implementation of this coverage.
A Simple Hazard Insurance Calculator
Hazard insurance generally amounts to anywhere between 0.25 percent an 0.33 percent of the property's purchase price, billed annually. With that in mind, a simple method of calculating the potential cost of hazard insurance is available. If, for example, your home was purchased for $475,000, the cost of a hazard insurance policy would be:
$475,000 x .0025 (the lower end of coverage prices) = $1,187.50
Although these calculations are a quick method of calculating the potential cost of your hazard insurance, the only definite method of gaining a full understanding of pricing is requesting a quote from a hazard insurance provider. As a general rule, you should obtain multiple quotes in order to ensure that you receive the best possible service and price.
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- If your family's asset base exceeds the maximum amount of liability coverage offered on the hazard insurance policy, consider a personal umbrella policy also. These policies add extra liability coverage in $1 million increments.
- If your hazard insurance does not include liability coverage, it may also not include contents coverage for your belongings unless you ask for it specifically.
Ryan Cockerham is a nationally recognized author specializing in all things innovation, business and creativity. His work has served the business, nonprofit and political community. Ryan's work has been featured at Zacks Investment Research, SFGate Home Guides, Bloomberg, HuffPost and more.