The Problem with Forced-Placed Insurance Policies

There are reports that homeowners are letting their insurance lapse because they can’t afford it anymore.

For people who own their homes outright this is a “get lucky or go bust” strategy. It’s not recommended, but we live in a country where people have the right to gamble with assets they own.

For people who have a mortgage, not having insurance isn’t an option.

If insurance lapses, the mortgage company will receive a letter from the insurance company to notify them of the lapse. In order to protect their interest, the mortgage company will buy a “Forced-placed” insurance policy for the home.

Homeowners need to realize that this type of insurance is much more expensive than a policy purchased by the homeowner and it will typically offer less coverage than an original policy. It’s meant to protect the lender’s outstanding mortgage balance and usually doesn’t protect the equity built by the homeowner in the property.

So, not paying for insurance is actually more expensive than paying for insurance. I wonder if homeowners understand this when making such a silly decision.