What is force-placed auto insurance?
Quick insights
- Lenders purchase force-placed auto insurance when a borrower's coverage lapses; the cost is generally added to your monthly loan payment.
- These types of policies typically only cover physical damage to the vehicle and do not provide liability protection for the driver.
- You can usually remove this coverage by purchasing a standard auto policy and providing proof of insurance to your lender.
Getting a notice that your lender has purchased insurance on your behalf might sound helpful until you see the price tag. Force-placed insurance is designed to protect the lender's investment. Understanding how this process works may help you avoid paying for this potentially expensive coverage.
Understanding lender-purchased coverage
When you sign an auto loan agreement, you agree to maintain continuous insurance coverage on the vehicle until the loan is paid in full. If your policy is canceled, expires or is deemed insufficient, your insurance company is required to notify your lender. The lender will typically send you a notice warning you that your coverage has lapsed and they may allow you a window.
If you do not provide proof of coverage within that timeframe, the lender will purchase a policy to protect their collateral. This is known as force-placed or lender-placed insurance. The lender will then add the premium cost of this new policy to your monthly auto loan payment.
This type of coverage is designed for the benefit of the financial institution or loan servicer, not the borrower. Because the lender is purchasing the policy without shopping around for the best rate, the premiums are often higher than what you would pay for a standard policy. If you do not pay the increased monthly loan amount, you could risk defaulting on the loan and facing repossession.
What does the policy cover?
Lender-purchased policies are different from the standard auto insurance you buy for yourself.
- Physical damage protection: The primary purpose of this policy is to cover the cost of repairing or replacing the vehicle if it is damaged or destroyed. This ensures the lender can recoup their financial investment if the car is totaled in an accident.
- No liability coverage: These policies generally do not include liability protection, which means you are not covered if you cause an accident that injures another person or damages their property. Driving without liability coverage is illegal in most states and leaves you financially vulnerable.
- No medical payments: If you or your passengers are injured in an accident, a lender-purchased policy will not cover your medical bills. You would be responsible for paying those expenses out of pocket.
- Coverage limits: The policy typically only covers the outstanding balance of your auto loan, rather than the actual cash value of the vehicle. If the car is totaled, you will not receive a payout for any equity you had in the vehicle.
How to remove the coverage
If your lender has applied this type of policy to your account, you can take steps to have it removed.
- Purchase a standard policy: Shop for a new auto insurance policy that meets your state's minimum requirements and your lender's coverage conditions. You can compare quotes from multiple carriers to find a plan that fits your budget.
- Obtain proof of insurance: Once you purchase a policy, you may wish to ask your insurance provider for a digital or physical ID card and a declarations page. These documents serve as proof that your vehicle is protected.
- Contact your lender: Reach out to your lender's customer service department and provide them with your new proof of insurance. You may need to upload the documents through an online portal or send them via email or fax.
- Verify the removal: Check your next monthly loan statement to check that the cost of the lender-purchased policy has been removed. If the charge is still present, follow up with your lender to confirm they processed your proof of insurance.
The bottom line
Lender-purchased insurance is designed to protect a financial institution's collateral when a borrower's coverage lapses. Because these policies lack liability protection and are often expensive, you may want to avoid them by maintaining continuous auto insurance. If a policy has been applied to your account, you may be able to remove it by purchasing standard coverage and providing proof to your lender.
