Cristina Pedraza, CPA, CIC
Senior Vice President, Popular Insurance, LLC
When you take out a mortgage loan, one of the most important requirements is acquiring insurance coverage for your property. Just as you become familiar with terms associated with FHA, conventional, or Veterans Administration loans as you research mortgage options, it is important that you become familiar with the types of insurance and the terminology you will encounter in a policy. Below, the ten questions our customers ask most often:
1. Why am I being asked to insure the property?
On the day you close your mortgage loan, you can begin to say with pride that the house of your dreams is finally yours. However, for the bank or lending institution, the property becomes a collateral or the guarantee that the money lent to you will be repaid. The mortgage bank wants the structure of the property to be kept in optimal condition, which means that it is protected should an event like a fire, hurricane or earthquake damage it. That’s why there are minimum requirements for insurance on the structure of the property—what is known as “hazard insurance.” And since you will live on the property and keep your belongings in it, you can expand your insurance and buy a Personal Package to cover your personal property and even your personal liability should someone be injured while in your home.
2. What is a premium and what does it have to do with the reserve or “escrow” account?
The premium on an insurance policy is the name given to the price of the product. When you take out a mortgage, the mortgage bank makes paying your insurance easier by depositing, or “reserving,” enough money in what is called an “escrow account” each month. That way, when the insurance policy is renewed, the bank pays the insurer to ensure continuity of coverage.
3. How long does a property insurance policy last?
Property insurance policies are renewed every year. That means that the premium or price of the product is valid for obtaining one year of coverage for the property, not the entire term of the loan. Likewise, the insurance is not a bank deposit, so the premium does not accumulate for future losses.
4. What is a peril?
A peril is that specific risk, or cause of a loss, covered by an insurance policy, such as a fire, earthquake, windstorm (hurricane), or vandalism. When an insurer is deciding whether it will or will not pay a claim, the first question it will ask is “What peril caused the damage?” Later, the insurer will check to see whether that peril is listed as covered under your policy or whether it is listed in the Exclusions section of the policy. There are perils excluded in all policies, and the losses caused by them are not covered.
5. Do property policies cover the flood peril?
In a word, no. The risk of flooding is one of the typical exclusions of a hazard policy, but it can be covered in a separate policy. If your property is in a flood zone, you will be required to purchase another policy for that particular risk. Even if you are not in a flood zone, we recommend that you consider purchasing this policy, including flood coverage for the contents of your dwelling.
6. What is a “limit”?
A limit is the maximum amount of a policy’s insurance coverage. A policy may have one limit on the structure, and other different limits if you have personal property or personal liability coverage.
7. How do I determine the limit I should purchase for the structure?
When you take out your mortgage, your property will be appraised by a professional appraiser. That is the best tool for initially determining the policy limit. The appraiser will indicate the amount it would take to replace the structure; that is, how much it would cost to rebuild the structure if it were totally destroyed. Your policy will use that amount as a point of reference for the policy limit. The policy limit does not include the value of the land the structure is built on. We recommend that you review the appraisal and be sure that the replacement cost section includes all the equipment attached to the structure: water tanks, solar water heater, power generators, solar panels, air conditioning units, etc.
8. What is “coinsurance” and what implications does it have?
Coinsurance is the percentage value of the insurance limit you should maintain in the policy. The coinsurance percentage is usually between 80% and 100% of the limit. If the amount of your insurance is determined to be below the coinsurance percentage, then a “penalty” applies, which will reduce the amount disbursed for a claim. Over time, the cost of rebuilding or replacing property may change. Likewise, improvements to our home increase that replacement cost. Therefore, it is important to periodically review the limits of the insurance to ensure they are adequate. That way, a coinsurance penalty is avoided.
9. What is a “deductible”?
As with your health or auto insurance, every property policy has a deductible. The deductible is an amount of money that you will have to absorb before the insurer makes a payment on, or indemnifies, a claim. The deductible is generally expressed as a percentage. The most common deductibles are 2% and 5% for fire, hurricane, and earthquake risks, and they are calculated on the basis of the insured limit of the specific coverage. The lower the deductible, the less you’ll have to pay out of your own pocket for the loss.
10. What is the difference between “replacement cost” and “actual cash value”?
Replacement cost is the amount you would need, when the loss occurs, to replace, rebuild, or repair the damage to your property with materials similar in type and quality, with no deduction for depreciation. On the other hand, the actual cash value is the amount that remains when the depreciation the property undergoes over time is subtracted from the cost of replacement. Both are methods of assessing the value of a property, and they will produce different results when a claim is paid, so you should know which method will be used to reimburse you for a loss under your policy.
Take this opportunity to read and review your insurance documents. Write down any additional questions you may have and consult your insurance agent or representative for advice. Your property is almost certainly your most valuable investment, so it is essential that you protect it appropriately.
Popular Insurance is by your side to guide you. If you have questions about your insurance coverage, contact us and one of our representatives will be happy to help you. Call 787-706-4111 (press 1 for Customer Service).
* Insurance products are not deposits, are not insured by the FDIC or any other federal government agency, are not guaranteed by the Bank, and may lose value. Popular Insurance is a subsidiary of Popular Inc. and an affiliate of Banco Popular. The information and general descriptions found in this article are designed to help you understand the factors that you should generally consider when evaluating property insurance. Any descriptions herein are solely for informational and educational purposes and for your independent consideration; is not intended to be viewed or construed as advice or suggestion for you to take (or refrain from taking) a particular course of action. In providing this information, we assume that you are capable of evaluating the information and general descriptions contained herein and exercising your independent judgment.