What Is Title Insurance, and Why Should You Care?

Title insurance protects a homeowner from disputes about the ownership of his or her property due to problems with the title. Those problems may include liens, defects and encumbrances not known to the owner at the time of purchase. You have the option of purchasing title insurance any time you own property with a title.

What Is Title Insurance?

Title insurance protects you in the case that the title to your property is disputed. For example, imagine the individual owner who lived in your house before you owed $50,000 in property taxes to the IRS. Those taxes are attached to the property itself, not to the owner. The IRS places a lien on the title until the sum is paid. When you buy the home, this should be disclosed to you, but it may not always be. You could face the lien yourself in the future. If you have title insurance, though, you will not have to.

How Does It Work?

Title insurance will pay out in the above event and others like it. Either the insurance will pay the IRS, or the insurance will pay you the value of the home. In either case, you are protected because you have paid for title insurance. If you did not have title insurance, you may be personally liable to pay the $50,000 in property taxes or at least the cost of attorney fees to have the taxes absolved. As a result, the cost of title insurance may be well worth the benefit.

How Much Does It Cost?

Title insurance is far less expensive than homeowner's insurance. Claims are relatively rare, keeping the cost low. However, the real cost of title insurance depends on the price of the property you are insuring. Insuring the title for a relatively inexpensive car will be far less than insuring a relatively expensive home. 

Should I Buy It?

In the United States, the titling system is actually quite complicated and often imperfect. Many homeowners find they do not have the original title to their home or that the IRS has a lien on the property. The risk is even higher with a car that, for example, has switched hands dozens of times before landing on the purchaser's lap. Since title insurance is relatively low cost, it is valuable in many scenarios. However, the cost of insurance will not be worthwhile if the relative cost of simply resolving the title dispute would also be low. Therefore, title insurance is much more important for property like a home than for property like a car.

Where Can I Get It?

Homeowner's insurance companies, car insurance companies and property insurance companies all offer title insurance. If you are purchasing a line, the insurer will first look deeply into the property records to determine if any outstanding liens or issues exist on the title. This can help you uncover a problem before it occurs. Some liens or issues are declared at sale, and these will not be covered in the insurance policy.