What Happens If a Bank Forces Insurance?
When a bank loans you money to buy a home or a car, it has a material interest in protecting the property. If you fail to do that with private insurance, the bank may force insurance of its own and foreclose on your loan if you refuse to pay for it.
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Auto Insurance
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Whether you drive your car or not, the bank wants to insure it against damage until your loan is paid off. Therefore, you must carry insurance coverage even if it is garaged all the time. Many auto insurance companies add vehicle lien holders to the policy and notify them when coverage lapses so they can take action of their own to protect the car. Forced auto insurance typically only offers benefits to the bank, not to you, and is often more expensive than a standard policy.
Forced Auto Insurance Consequences
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If your bank forces auto insurance on you, it will also pass along the cost of the insurance to you, usually by adding it to the outstanding balance of your loan. This means your monthly payments will increase, and the premiums will be subject to the same interest rate as your loan principle. The terms of your auto loan may or may not allow you to replace the forced insurance with a private policy, and some insurers may not want to sell you a policy once you let your prior coverage lapse.
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Home Insurance
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Like auto lenders, home mortgage lenders also have a financial interest in protecting the property for which they lent you money. Many mortgage agreements require you to carry homeowner's insurance as a condition of the loan, and lenders reserve the right to force hazard insurance on you if your coverage lapses. This insurance is typically much less broad and more expensive than standard coverage, and all benefits are usually payable only to the lender.
Forced Home Insurance Consequences
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Some lenders allow you up to 30 days to find new coverage before they force insurance on you, so find a new insurer if your coverage lapses to avoid the expense and headache of forced coverage. Many insurers check insurance history when they consider you for coverage; if you have a period of forced insurance, you may be placed in a high-risk category and pay higher premiums accordingly. Also, the bank's insurance often doesn't contain liability coverage, so you are at risk of major financial losses if you are sued without protection.
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References
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