What is force-placed insurance?

Man sitting at his desk, checking his mailImage: Man sitting at his desk, checking his mail

In a Nutshell

Carrying auto insurance is required by law in most states, and if you’re financing your vehicle, your loan servicer may require coverage, too. If you fail to carry adequate insurance, your lender can get insurance to cover the vehicle. This so-called “force-placed” insurance can be costly — and it may still leave you lacking in coverage.
Editorial Note: Intuit Credit Karma receives compensation from third-party advertisers, but that doesn’t affect our editors’ opinions. Our third-party advertisers don’t review, approve or endorse our editorial content. Information about financial products not offered on Credit Karma is collected independently. Our content is accurate to the best of our knowledge when posted.

If you’ve recently let your auto insurance lapse or didn’t buy enough insurance coverage, you may be in for a big, expensive surprise when you open your next auto loan statement: force-placed insurance.

Also known as lender-placed insurance, force-placed insurance is exactly what it sounds like: an insurance policy that your lender forces on you. This coverage is designed to protect the lender’s property — the vehicle you’re financing — and the lender will charge you for the insurance.

Let’s take a look at the reasons a lender might get force-placed insurance on your car, the drawbacks of this type of insurance and what you can do to remove force-placed insurance from your car loan.

Why lenders get force-placed insurance on a car

When you sign an auto loan contract, you’re agreeing to its terms. Many loan contracts require you to get enough insurance to cover the vehicle. If you fail to carry the proper insurance — or opt not to get any insurance at all — the contract could give the lender the ability to buy insurance coverage on your car to lessen the risk.

There are two main reasons your lender could get force-placed insurance for your vehicle.

1. You didn’t buy enough insurance coverage

Almost all states require basic liability coverage that can pay other parties for damage or injury in an accident. Typically, lenders may also require collision coverage — or both collision and comprehensive coverage — when you finance a car. This is the lender’s way of trying to make sure your auto loan will be repaid if the vehicle is damaged, totaled or stolen.

2. You let your car insurance lapse

It’s important to make your insurance payments on time — otherwise, you could have a lapse in coverage or your insurance company could cancel your policy. A lapse in auto insurance coverage could also occur if you let your policy expire without renewing it.

If you’re forgetful or have a busy schedule, try to take advantage of any helpful tools offered by your insurance company, such as automatic payments or mobile apps for paying on the go.

Drawbacks of force-placed insurance

Force-placed insurance can come with some financial consequences.

The monthly cost of having a car will go up

You may be considered higher risk if you don’t have your own car insurance. As a result, the premiums for force-placed insurance are usually higher. And even though your lender is the one taking out the policy, you’re the one who pays for it. 

Only the lender is protected

Force-placed insurance policies are generally designed to protect the lender, not you — even though you’re the one paying. If your vehicle is ever destroyed or stolen, force-placed insurance can help the lender recoup some or all of the amount you owe on the loan.

You may still need additional auto insurance

Although lender-placed insurance can help protect your lender, coverage is limited. For example, it may not include liability insurance, which, as we mentioned, most states require. If you don’t have liability coverage, your driver’s license and vehicle registration could be suspended, depending on the rules in your state. And if you were to cause an accident, you could be on the financial hook.

How can I remove force-placed insurance from my car loan?

If your lender has added force-placed insurance to your loan, here are some steps you may be able to take to remove it.

Keep making your loan payments

Since your auto loan now includes force-placed insurance to protect your vehicle, any lapses can get you in trouble, especially if something happens to the car. You might think the force-placed insurance was a mistake or unfair action on the part of your loan servicer, but it’s important to keep paying your lender on time — even though the payments are higher.

Get a new auto insurance policy as soon as possible

Call your old carrier and find out if you’re able to get your old policy reinstated. If not, shop around for new car insurance quotes, and find a plan that includes the coverage your contract — and state law — requires and that works within your budget.

How much car insurance do I need?

Contact your lender

Once you have confirmation of your new auto insurance policy, contact your lender and ask for the force-placed insurance to be canceled. You’ll likely have to provide proof of coverage, so be prepared with any documents you might need for that.

Bottom line

Force-placed insurance is expensive and aimed at protecting the lender, not you. To avoid it, carry the coverage required by your contract and pay your insurance premiums on time.

If you’re struggling to make your car insurance payments, it may be time to shop around for new insurance to see if you can get a better deal.

About the author: Sarah Archambault is a freelance writer based in New England. She enjoys learning new ways to spend money wisely and helping others figure out how to make smart financial decisions. Sarah is a graduate of the Newhouse… Read more.