
Hazard insurance escrow is a common practice in the homeowners insurance industry, but what exactly is it and how does it work?
The purpose of hazard insurance escrow is to ensure that homeowners have adequate hazard insurance coverage to protect their lender's interest in the property.
In most states, lenders require homeowners to set aside a portion of their annual property taxes in an escrow account, which is then used to pay the hazard insurance premiums. This is typically done through a monthly or annual payment.
This practice helps to ensure that homeowners have enough money set aside to pay for hazard insurance premiums, which can be a significant expense.
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What is Hazard Insurance?
Hazard insurance is a type of insurance that protects against damage to a house, such as fire or other disasters.
Always ensure you're named as the loss payee, so the insurance company knows to pay you first in case of a loss.
If you're paying your insurance policy monthly, that's fine, but don't count on the borrower having all the money needed for an annual payment.
You can escrow every month for 1/12 of the insurance premium and get 2/12 up-front at loan closing to avoid potential issues.
Paying for Homeowners Insurance

If you have an escrow account, your insurance premium will be added to your monthly mortgage payment and set aside until your insurance bills are due. This way, you won't have to worry about making separate payments.
The money will be used to pay your insurance bills on your behalf, making the process much more convenient.
If you don't have an escrow account, you'll need to pay your insurance company directly, which can be a bit more complicated.
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Coverage Requirements and Escrow
As a homeowner, it's essential to understand the coverage requirements and escrow process for hazard insurance. Most lenders require you to have insurance coverage of at least 100% of the estimated cost to repair or replace your home, as stated in the lender's guidelines.
You'll also need to consider additional policies, such as earthquake insurance, if you live in an earthquake-prone area. This is because hazard insurance typically doesn't cover damage from natural disasters like earthquakes. Your lender may require you to purchase a separate policy for this type of coverage.
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The escrow process for taxes and insurance is also mandatory if you have less than 20% equity or any type of government-backed mortgage. This means a portion of your property taxes and insurance premiums will be collected monthly as part of your mortgage payment, and held in an escrow account to be paid when the bill is due.
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What's Covered vs. Not Covered
Most natural disasters and some malfunctions within the home are covered by hazard insurance. However, certain types of damage aren't covered and you may need special or additional policies.
If your home is in an earthquake-prone area, it may not be covered by hazard insurance, so you might want to also purchase earthquake insurance separately.
Your hazard insurance coverage will change depending on where you live, so you may add additional insurance or purchase a separate policy that covers specific occurrences.
Additional reading: Earthquake Insurance
Coverage Requirements
Your lender requires you to have coverage of at least 100% of the estimated cost to repair or replace your home.

Insurance requirements vary by property type, so be sure to ask your insurance provider for specifics on condo requirements, for example.
You may not be protected from accidents on your property or have your personal property replaced if it's damaged, destroyed, or stolen, so be sure to ask your insurance agent about these details.
Certain natural disasters or hazards, such as fires, severe windstorms, or hail, may not be covered by your hazard insurance policy unless explicitly listed.
It's crucial to read through your homeowners insurance policy and speak with your insurance agent to learn what exclusions or risks your policy may have.
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Deductibles
A homeowner's insurance policy typically has a deductible, which is the amount you must pay before the insurer will cover a claim.
The amount of your deductible will directly impact your premium cost. A loan policy with a higher deductible usually carries a lower premium cost.
Republic Bank requires that your deductible does not exceed 5 percent of the total value of your home, or $5,000.00, whichever is greater.
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Frequently Asked Questions
Can I remove hazard insurance from my mortgage?
You can remove hazard insurance from your mortgage after paying it off, allowing you to adjust coverage or cancel the policy. However, your lender may need to release the mortgage lien first.
Sources
- https://www.mortgage-investments.com/mortgage/escrow-real-estate-taxes-and-hazard-insurance/
- https://www.rocketmortgage.com/learn/hazard-insurance
- https://www.nationwide.com/lc/resources/home/articles/changing-homeowners-insurance-with-escrow
- https://www.republicbank.com/home-loans/mortgage-resources/homeowners-insurance/
- https://pivotlending.com/how-escrows-work/
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