What’s Force-Placed Insurance and Why You Should Avoid It

When you take out a mortgage to purchase your home, the mortgage lender usually will require that you maintain a certain level of homeowners insurance regardless of where you live – Wichita, Boston, Fresno, Memphis, Cleveland – it doesn’t make a difference. If you do not keep this insurance current, the lender often has the right to place the coverage on your behalf and charge you for it. It might seem like a simple solution, but there are often many pitfalls with “force-placed” coverage, so you should avoid being subject to it.

It’s logical for your mortgage lender to require you have home insurance on the house you purchased through their loan. Since most homebuyers only have a down payment of 20% or less, the mortgage lender carries the majority of the financial risk on a home. This means if the home were damaged or destroyed, the lender stands to lose more than you do. Therefore, it’s common for lenders to have a home insurance policy in place just in case.

In many circumstances, the mortgage lender will require you to pay for your insurance at the same time you make your monthly mortgage payment. This process is known as “impounding,” and the lender will then pay your home insurance premium on your behalf with the funds you have deposited with them. Property taxes are also commonly impounded. By impounding your insurance premiums each month, the lender can know immediately if you are current with your home insurance premium.

If, however, your premiums are not impounded or you simply let your premium and policy lapse, the mortgage lender may immediately step in to remedy the situation. Instead of paying your home insurance premium on your behalf, the lender will likely insure your house with its preferred insurer under a force-placed policy. You are still responsible for the premium payment, but you are no longer in control of the policy and its terms of coverage.

The mortgage lender’s primary motivation in force-placing your insurance coverage is to protect its asset. The lender is really not concerned about your personal property and the coverage will reflect that. Additionally, it’s very common for force-placed insurance to be more expensive than insurance you would normally purchase on your own. Because the mortgage lenders handle a large number of homes that may require force-placed insurance, they have strong relationships with certain insurance companies. It’s also possible they may have an ownership interest in the insurance company used to force-place your policy. In other words, saving you money is not their primary interest with force-placed insurance. According to Bloomberg.com, a good percentage of the premium on force-placed insurance ends up back in the mortgage lender’s hands.

Keep in mind that mortgage lenders also often become concerned about your financial stability when they have to force-place your policy. If you have allowed your home insurance to lapse, it may be a sign of financial difficulties and you present a potential foreclosure risk to the lender. This causes them to do what is necessary to protect their investment in your home. However, if you are experiencing financial difficulties, do not allow yourself to be put into a force-placed insurance policy situation. Recent studies show that the high prices of such policies may be the final tipping point for homeowners teetering between solvency and foreclosure.

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