Forcing Out Force-Placed Insurance

iStock_000016583408XSmallNot too long ago, we warned you of the problems with force-placed insurance and how to make sure that you avoid it. It now appears that the government is also taking action against this practice and homeowners might get some relief. Nonetheless, it’s still a good idea to keep your home insurance in place to avoid the possibility of being charged for force-placed insurance. If you aren’t familiar with the practice, read on and we’ll explain what happens, why it happens, and how to avoid it!

When you secure a mortgage from the bank to purchase your home, the bank uses your house as collateral for the money it loaned you. Therefore, the bank is very interested in making sure that their collateral is well-protected by insurance. It’s very common for the bank to require that you maintain home insurance in an amount sufficient to cover their loan and investment in your home. In many situations, you pay this every month along with your mortgage bill in what’s known as an impound or escrow account. It’s common for home insurance and real estate taxes to be impounded or escrowed. The mortgage bank then takes the money you send them and they pay your premiums and taxes on your behalf. They can then be assured that everything is up-to-date.

If, however, you don’t have an impound account, you probably have to send your mortgage bank a copy of your insurance policy each year when it renews. The mortgage bank wants to verify that it’s in force. The problem is when you don’t have the coverage in place or don’t provide evidence to the bank. They can then put insurance in place on your behalf. Unfortunately, this insurance is often very expensive and the coverage is designed to protect the interests of the mortgage bank and not the homeowner. In many cases, the cost of this has been so exorbitant that it’s gotten the attention of lawmakers who are now contemplating some new regulation, according to the New York Times.

You might think that it can be handy to just let your mortgage bank find coverage for you and charge you for it. Unfortunately, the bank really only cares about their asset, which is the house itself. They have no interest in your personal property and only a passing interest in your personal liability if it relates to the asset (see a consistent theme here?). Therefore, it’s definitely not in your best interest to take a back seat when it comes to your home insurance.

The best way to avoid any problems with force-placed insurance is to never allow your insurance to lapse. While avoiding the cost of force-placed coverage is a good idea, the true motivation for you should be to always maintain proper insurance. By doing so, you avoid unnecessary cost for a product that doesn’t even provide you with full protection or benefit. You need to make sure that the insurance you purchase on your own is sufficient to meet both your needs and the requirement set forth by your mortgage bank.


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