Modern life is filled with challenges and protecting our assets can be complex. Owning a home or a car means maintaining homeowners and auto insurance. In one form or another, the practice of buying insurance has been with us for hundreds of years. The principle theories underpinning the practice are two fold. The first is to protect one’s assets from loss, enabling the asset holder to be returned to the same position before the loss. The second and equally important principle is to spread the risk associated with compensating the asset holders.

There are simple forms of insurance that most of us are familiar with and have become not only necessary but in some situations legally requires. Homeowners and auto insurance protects not only consumers but provides a way for lenders to limit exposure from covered losses.

Homes and cars purchased with money borrowed from a bank, credit union or other lender are subject to higher average insurance costs. The reason for this is simple. The home or the vehicle is typically the collateral for the loan, giving the lender an interest in protecting its investment. Lenders commonly require the borrower to purchase and maintain full coverage homeowners and auto insurance.

When it comes to auto insurance, the rules and requirements can vary widely from one state to another. Most states require at least some level of liability insurance or posting of a financial responsibility bond. The idea is to ensure that victims of a vehicular accident are not left without recourse against the party at fault. Injured parties always have the right to file civil suits but lawsuits can be costly and take much longer to settle than an insurance claim or claim against a bond.

For example, if you purchase a vehicle and a collision, flood or other event damages the vehicle beyond repair or in excess the vehicle’s value, insurance policy payouts may be made to the lender to cover any outstanding loan balance.

The same situation may occur with homeowners insurance. As collateral for a mortgage, the lender and the homeowner each have a vested interest in the home. Fire, flood or other event may leave the home damaged beyond repair. Carrying an adequate amount of homeowners insurance helps to protect both the lender and the borrower.

This material is meant only as a guideline. Always consult a qualified legal or insurance professional.