Do I need a separate "Disaster Recovery" insurance policy?

Question

I recently got a letter from my mortgage company, offering me an additional insurance policy that will pay my mortgage payment if my home is damaged by a disaster for up to 24 months. And for each month that we can't live in our home, it pays $1000 to us. If the house is condemned, they will pay off the mortgage. If we ever make a claim on our regular homeowner's policy and have a deductible we need to pay, this policy would reimburse that amount, up to twice a year.

It's pretty cheap coverage...less than $30 a month. I'm trying to figure out if this is something we need. We live in the Midwest, and our area does not have huge weather events, but it does have occasional tornadoes.

Answer 1

I would get federal disaster insurance for I were U. It's free

Answer 2

$30 per month is $360 per year.  Your homeowners insurance would pay for most disasters (NOT flood) less your deductible, there is also loss of use on the policy that would pay for the difference in your costs if you have to live elsewhere when your home is being repaired & you can't live there.  Homeowners insurance covers tornadoes.  If you buy this insurance, there is a clause in your homeowners policy about other collectible insurance & if there are 2 policies covering the same thing, they will only pay a portion of the loss compared to the coverage of each policy.  Say this disaster policy covers $100,000 - your mortgage amount - your homeowners policy covers $200,000 - cost to rebuild (for sake of easy numbers), your homeowners policy will only pay up to 2/3 of the loss & your disaster policy may only pay 1/3.  If your disaster policy pays first, your homeowners policy will probably only pick up the rest - say there is a $150,000 loss & your disaster policy pays $100,000, your homeowners will only pay $50,000.

You will not be able to collect twice for a loss.  Insurance is to put you back to where you were before the loss, NOT better.  You will not be able to have your  mortgage paid off AND get a new house without a mortgage.  Sorry, won't happen.

If this disaster policy includes flood coverage, you may want to consider it, just because it may be cheaper than a flood policy with NFIP.  But, read the fine print of this policy before you purchase it, it may just be duplicate coverage & really quite worthless.  If you are looking to get reimbursed for your deductible, figure out how many claims you will put on your homeowners (if you put in 2 claims per year, I guarantee you will be nonrenewed within 2 yrs & have a hard time finding homeowners insurance again) over the life of your mortgage (the last statistic I heard is the average homeowner  has one claim every 11 yrs, most have none, some have more).  Is it worth $360 per year to get your deductible back once every 5-10 yrs?  Put the $360 in a bank account, collect interest on it & you will have your deductible saved & then some in no time.