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If you don’t want to pay more for less protection, you need to read this.
Key points
- Having sufficient insurance coverage is crucial to protect assets.
- There’s one type of insurance no one should ever want.
- Force-placed insurance costs a lot and provides less coverage.
Having the right insurance is essential to provide important protection for assets. This includes auto insurance to protect against losses caused by car accidents as well as homeowners insurance to provide coverage in case of a disaster at home.
There’s one type of insurance no one should ever want, though. And it’s important to understand what it is and why some people might end up getting it even if they don’t intend to.
Steer clear of this type of insurance coverage
One key type of insurance that everyone should aim to avoid getting is called force-placed insurance. This is a kind of coverage that consumers don’t buy directly but rather that is bought for them. Here’s how it works.
When people take out certain types of loans such as home loans or car loans, they are required to have specific types of insurance coverage in place. Their lenders mandate this because the house or car acts as collateral and guarantees the loan. Lenders want their collateral to be protected in case of loss, so they mandate certain kinds of insurance to protect the property.
Sometimes, however, drivers or homeowners allow the required insurance coverage to lapse because they don’t pay premiums or they cancel a policy they are mandated to have. If that happens, lenders are typically able to buy force-placed insurance. And this is insurance no one should want.
What’s wrong with force-placed insurance?
There are two big issues with forced-placed insurance that make it so undesirable.
The first problem is that this kind of insurance usually costs much more than a standard policy would. Lenders don’t shop around to get the most affordable insurance. They buy from carriers that may have higher premium prices for force-placed coverage.
The second issue is that force-placed coverage is usually designed only to protect the property in order to make sure the lender doesn’t suffer losses it can’t recover by seizing and selling the collateral if needed. The policies are not meant to provide the type of broad asset protection people need.
For example, force-placed homeowners insurance coverage would typically cover the dwelling only. It would not usually provide liability protection for the homeowner. If someone was hurt on the property and the homeowner was sued, there would be no insurer to foot the bill for legal fees or to pay for any losses the owner was ordered to cover. It would also not cover the homeowner’s personal property, so if the property was damaged or destroyed, the homeowner would get no compensation and would have to replace everything with their own money.
Obviously, paying a lot of money for coverage that provides little protection is not something anyone should want. The good news is, it’s easy to avoid force-placed insurance by simply making certain that coverage requirements set by a lender are fulfilled. Anyone with a car or home loan should know what insurance protections they need to have in place and should shop around for affordable policies to comply with those requirements. After purchasing insurance, it should be maintained at all times without lapses.
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