Your Homeowner’s Insurance vs. Forced-Placed Coverage
Your home is your biggest investment. As such you want to protect that investment but in these tough economic times, as Massachusetts homeowners continue to struggle with high unemployment and growing mortgages, it may be tempting to let your homeowner’s insurance lapse to save money. If you’re considering this idea, we urge you to reconsider. There are several reasons why this is NOT a good idea. For one thing, if you drop your homeowner’s coverage, you will be responsible for any repair or replacement costs you incur. More importantly, your mortgage contract requires that you carry homeowner’s insurance. If you do not maintain homeowner’s insurance, your lender will be only too happy to buy it for you. This is called force-placed insurance, and this is something you want to avoid.
What is the difference between a force-placed insurance policy and a homeowner’s policy?
A Massachusetts homeowner’s policy, which you can purchase on your own, provides more coverage and typically costs less than force-placed insurance. Unlike a homeowner’s policy, force-placed insurance policies do not provide protection for personal property, such as clothing and furniture. Additionally, a force-placed insurance policy does not include liability coverage that pays if you are responsible for damage or injuries to others. Some force-placed insurance policies limit the amount of the coverage to the outstanding balance of the loan. This type of force-placed policy is commonly referred to as a single-interest policy because it only protects the lender’s interest in the property. If the house is destroyed by a fire or other covered cause of loss, the single-interest policy typically only pays enough to pay off the outstanding balance on the loan to the lender.
So what’s so wrong with this picture? Two things: you’re still going to have to pay for the force-placed insurance; and it’s not going to be cheap. Your lender is under no obligation to shop for competitive homeowner’s insurance quotes. Frequently the lender will buy the policy through a high-risk insurance carrier where the rates are exponentially more than they would be through a conventional insurance company. That’s because you’re now seen as a bad risk, and in the insurance world, bad risks are charged higher premiums.
Also, you may not realize that if you fail to carry or pay for your required homeowner’s coverage, even if you’re making your mortgage payments on time, your lender can refuse to accept your mortgage payment or put your payment into a hold account. In the meantime, late fees may be tacked on and you could end up in default of your mortgage.
The bottom line is your best bet is to maintain your current homeowner’s insurance policy. If you need to save money, go with a higher deductible and take advantage of every available discount such as multiple-policy discounts and anti-theft discounts.
To learn more about your Massachusetts homeowner’s insurance coverage and to ensure you are receiving all the discounts you are entitled to, call Vargas & Vargas Insurance at 1.800.550.0025.
