Escrow Insurance Vs. Homeowners Insurance

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If you have bought a home, you probably used an escrow service to coordinate the various parties involved in the real estate transaction. If you paid your homeowners insurance through escrow, your mortgage lender or escrow representative may have referred to the insurance as escrow insurance, leaving you unclear on the difference between escrow insurance and standard homeowners insurance.

Homeowners Insurance Basics

Homeowners insurance typically is required if you have a mortgage on your home. It provides protection for damage to your home, any secondary structures on your property and your belongings. It also provides relocation expenses if your home is uninhabitable after a loss, personal liability protection and a small amount of no-fault medical coverage for minor injuries. Depending on the insurer and type of policy, other coverages, such as loss assessment, may be available for additional premiums.

Escrow Basics

Escrow refers to a party that coordinates all aspects of a real estate transaction. In a typical real estate sale, you, a mortgage lender, an insurance company, a title insurer and other parties work toward a common goal with a shared deadline. The escrow company creates an account into which all payments are held until everyone has what he needs to complete the transaction. The escrow company then issues the proper payments to all parties.

Insurance Payments in Escrow

An escrow account is simply an account that holds funds while waiting for various due dates. Therefore, the term "escrow insurance" does not refer to a type of insurance product, but rather to the policies for which premiums are placed in the escrow account. The most common type of insurance placed in escrow is homeowners insurance. Premiums for the homeowners insurance are placed in the escrow account pending the escrow close date, or the date the real estate transaction is completed. Title insurance premiums also are frequently placed in escrow.

Other Uses For Escrow

Though most commonly used for real estate transactions, escrow accounts also can be used to collect funds throughout the year after you buy your home. Homeowners insurance, for example, is typically sold for a 12-month term, so you must pay premiums every year. Many homeowners do not budget for this annual expense, so they choose instead to make monthly payments to the escrow account, and the escrow company provides a single annual payment to the insurance company. Many homeowners also do this for their property taxes.