What does title insurance actually cover? A one-time policy against somebody else turning out to have a claim on the property you just bought.
Title insurance covers losses from defects in the ownership history: an unreleased old mortgage, an unpaid contractor's lien, an heir nobody knew about, a forged signature, a boundary recorded wrong. Unlike every other insurance you buy, it covers the past rather than the future, which is why it is paid once at closing rather than monthly.
There are two policies and they are not the same thing. The lender's policy protects the lender for the loan amount and is required on every financed purchase. The owner's policy protects you for the purchase price, is usually optional, and is the one worth understanding before declining: without it, a successful claim against the title leaves the lender covered and you not.
Who pays which policy is regional custom and, like everything else at closing, a contract term. The title search that precedes the policy is the useful part either way, because it is somebody being paid to find out what is recorded against the parcel before you own it.
A worked example
A buyer closes at $430,000. The lender's policy costs a few hundred dollars and covers the loan; the owner's policy is a one-time premium scaled to the price. Two years later a contractor who was never paid by the previous owner records a lien. The owner's policy is what pays to clear it.
Questions people ask
Is title insurance required?
The lender's policy is required on any financed purchase. The owner's policy is usually optional, and it is the one that protects you rather than the bank.
Who pays for title insurance?
It depends on local custom and on what the contract says. In many places the seller pays for the owner's policy and the buyer for the lender's; in others it is the reverse, and everything is negotiable.