Humber/Ontario Real Estate Course 3 Exam Practice

If a seller prepaid $1,000 for home insurance and the sale closes on February 15th, what is correct about the statement of adjustments?

1. No adjustment because insurance is non-transferable

2. Seller credits prepaid amount February 15th to year-end

3. Seller’s adjustment is $123.29 with balance credited back

4. Seller credited $1,000 for the prepaid amount

5. Insurance split equally between buyer and seller

6. Payment differences calculated without adjustments

The correct answer is: No adjustment because insurance is non-transferable

The correct statement regarding the seller's prepayment for home insurance relates to the nature of home insurance policies and their transferability. In real estate transactions, insurance policies typically are tied to the individual who purchased them. Since home insurance covers liabilities and risks related to the property for a specific policyholder, it generally cannot be transferred from the seller to the buyer. Consequently, the buyer would need to obtain their own insurance policy after the sale. Because of this non-transferability, there is no need for an adjustment on the statement regarding insurance, as the prepaid amount does not apply to the buyer. This reinforces the idea that the prepaid insurance does not contribute to the buyer's costs or their coverage, and thus there is no adjustment necessary for this item during the closing process. In practice, this means that while other costs might be prorated or adjusted based on the closing date, prepaid insurance by the seller does not factor into the calculations that would typically be conducted between the buyer and seller in a real estate transaction.