Title insurance is an expensive form of insurance that is taken out at the point of requesting a mortgage. This is required by mortgage providers, but the burden is usually placed on the buyer, ensuring that they have an additional bill to foot on top of the numerous other expenses associated with buying property.

But is such insurance really necessary? What would happen if you were to forego the product?

The Role of Title Insurance

The role of title insurance is to protect and ensure your ownership of a property. This process involves a series of checks that are carried out in order to verify that the seller indeed owns the property and is therefore able to sell.

In some cases, a seller may be trying to scam a buyer by selling property they don’t own. In other cases, there may have been a transfer of ownership that wasn’t properly logged, and which means the property does not in fact belong to the person who is selling. This could also be the result of title fraud. Here, a cybercriminal will use identity theft in order to transfer ownership of a title to themselves, and will then use the property as collateral in order to take out lots of large loans. Should the seller then sell their property – unaware of the fraud that has occurred – this could again create issues.

The outcome of any of these scenarios is that the buyer may end up with no property and a huge mortgage to pay. This is a cost that most of us could not afford!

So, what is the solution? Usually, this will involve asking a lawyer to perform a title search. The lawyer will then trace the documentation back and ensure that ownership has been transferred as expected and that the seller is therefore legally entitled to sell their property.

This process can cost tens of thousands of dollars however – and often is not comprehensive or watertight. Therefore, title insurance companies step in to provide peace of mind. This might entail a more surface-level search, but also means that the company will pay on your behalf should anything go wrong.

Statistics

But just what is the chance of something going wrong? How likely are you to need title insurance?

One report suggests that the pay-out on average is about 5% of the premium. This is particularly low, and it means that the companies are making a lot of profit.

But keep in mind as well that the insurance premium is a one-off payment, as is the pay-out. Not only that, but the pay-out can potentially occur many years down the line, long after the transaction is complete.

In the state of Iowa, the payout is even lower at 1%. This is because the insurance is handled by a state-governed organization, which actually does perform all checks prior to closing the deal. It’s worth noting that insurance is also far cheaper in Iowa.

Is Title Insurance Worth it?

The big question then, is whether title insurance is really a worthwhile investment for the typical house buyer.

Most of the time title insurance is required by the lender so you have no way to opt out but the answer is that in a strictly statistical sense, title insurance is not worth the expense. The likelihood of it being needed is also very low. The average individual would gain more money by not taking out title insurance.

But at the same time, this is not the correct way to think about any kind of insurance. An insurance policy is the perfect example of something it is better to “have and not need” than to “need and not have.”

In other words, if you take the risk of not taking out insurance and then find that the property was not legally the seller’s, you may end up financially crippled.

The question to ask when considering insurance is not whether or not you will be better off by taking it out, but rather whether you can possibly afford not to have it.

And on that basis, title insurance is absolutely worth investing in – and is in fact one of the single most important forms of insurance there is.