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What is force-placed car insurance, and when do lenders require it?

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When you finance a car, most lenders require you to buy insurance above the state minimums. If you don’t buy suitable coverage, your lender in most cases can buy an insurance policy for you and make you pay for it.

Force-placed insurance is an insurance policy that a creditor buys on your behalf and adds to your monthly payments. Force-placed insurance can cost you big time, but it’s easily avoidable. Read on to understand how force-placed auto insurance works, how to avoid it, and how to get force-placed insurance removed.

Understanding force-placed auto insurance

Force-placed auto insurance is a temporary car insurance policy that a lender buys for a borrower and charges the borrower for if they don’t obtain proper car insurance coverage. It’s also referred to as lender-placed insurance, creditor-placed insurance or collateral protection insurance. Mortgage lenders also use this type of insurance policy when a borrower fails to maintain sufficient homeowners insurance.

You could find yourself on the hook for lender-placed insurance in the following circumstances:

  • You cancel your car insurance and don’t obtain a replacement policy.

  • You let your insurance policy lapse, which can happen as the result of late or missed payments.

  • Your insurance coverage is determined to be insufficient. For example, if you purchased liability coverage (which most states require) but didn’t obtain collision coverage and comprehensive coverage (which most lenders require), your car loan agreement probably says that your lender can buy force-placed insurance on your behalf.

  • You don’t provide proof of coverage to your auto lender.

Most lenders tack on the cost of a force-placed insurance policy to your monthly payment. For example, if your car payment is $300 and your lender force-places a $150-a-month insurance policy, your car payment would balloon to $450. You’ll typically need to make backdated payments, so in the example above, if you were without insurance for four months, you’d need to make $600 worth of retroactive premium payments.

The exact cost will depend on a number of factors, such as the value of your vehicle, your state, and your lender. But this type of coverage is almost always more expensive than purchasing a policy on your own. Moreover, when your lender shops for coverage on your behalf, they aren’t motivated to find the lowest possible price because you’re paying the bill. In recent years, some critics have accused insurers and lenders of making excess profits from force-placed insurance.

Why it’s used

Creditor-placed insurance is used to protect the financial interests of your lender, rather than to provide financial protection to you. Most auto loan contracts require you to have comprehensive and collision coverage so that the lender can recover the amount you owe if your vehicle is destroyed or stolen. If you don’t provide proof that you have adequate insurance coverage according to your lender’s requirements, they can force-place coverage on you.

What force-placed insurance covers

Most force-placed insurance only protects the lender. It often doesn’t include liability insurance, which pays for damages and injuries to others caused by you or someone else driving your car. Liability insurance is required in nearly every state.

Even if your lender buys collateral protection insurance, it may not be sufficient to meet your state’s minimums. Depending on your state, you could have your driver’s license suspended. You could also wind up having to pay out of pocket if you’re involved in a crash that injures someone or damages another person’s property.

Read more: What happens if you don’t have car insurance?

How to avoid force-placed auto insurance

Avoiding force-placed auto insurance is relatively straightforward as long as you don’t let your insurance lapse and provide proof of insurance to your lender. Follow these tips to ensure you don’t have any issues:

  1. Read your loan documents. Make sure you understand your loan documents and contact your lender or your insurance agent if you’re not sure your coverage is sufficient.

  2. Have proper insurance in place before you leave the car dealership. Be sure to pay your policy premiums on time so you won’t have policy lapses. Also avoid policy cancellation until you have a new insurance policy in place.

  3. Shop for a new policy or have your old one reinstated if your coverage has lapsed. Getting your own auto insurance policy is almost always cheaper than a force-placed policy, and it provides better protection. If you receive a notice of cancellation from your insurance company, take action quickly. Policy lapses can lead to force-placed insurance, and they also put you at financial risk if you’re in a car accident.

  4. Send your lender proof of insurance. Contact your insurer to be sure that your lender is listed as the lienholder on your policy. Then follow up with your lender to confirm they’ve received the necessary proof of coverage.

  5. Respond to any communications from your lender. Federal law mandates that lenders send written notice 45 days in advance stating that they intend to force-placed insurance. They’re also required to send a second reminder notice at least 15 days before purchasing this policy.

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How to remove force-placed auto insurance

A force-placed auto insurance policy is only temporary. Once you obtain proper coverage, your lender is required to cancel it. Follow these steps to remove force-placed auto insurance:

  1. Check with your lender about its requirements. Your lender’s insurance requirements are probably different from your state’s requirements. State laws don’t require comprehensive or collision insurance, but most lenders do. Make sure you understand the types of coverage required, as well as the minimum amounts.

  2. Shop for a new policy or ask your insurer to reinstate your coverage. The only way to have a force-placed insurance policy removed is to buy your own coverage. You can lower your premiums by obtaining insurance quotes from multiple companies and asking about discounts.

  3. Continue making your car payments, including the additional insurance premium. Until you’ve resolved the matter, you need to keep making your loan payments with the extra force-placed premiums. If you don’t pay, the lender could repossess your vehicle.

  4. Provide proof of coverage to your lender and request that they cancel the policy. Once you’ve provided proof that your vehicle is properly insured, your lender is required to cancel your force-placed car insurance.

  5. Ask for a refund if you had sufficient coverage all along. Sometimes, force-placed insurance is issued by mistake. If you switched insurers, for example, it’s possible that your lender received a notice of cancellation from the old insurance company but didn’t receive proof of insurance from the new one. You’re typically entitled to a refund in these cases, so be sure to request one when you submit your documentation. If your loan company refuses, you can file a complaint with the Consumer Financial Protection Bureau.

While force-placed insurance can be costly, the issues that cause them (like a policy lapse) can lead to bigger financial problems. A lapse in coverage often results in higher insurance premiums because insurers see you as a bigger risk. Policy lapses could also cause your driver’s license to be suspended and put your finances in jeopardy if you’re in an accident. Maintaining sufficient insurance coverage and staying current on your premium payments will help you avoid force-placed car insurance and potentially bigger financial problems down the line.