Key Takeaways
- Lenders will buy insurance for you if you allow your own policy to lapse.
- Forced-placed insurance is incredibly expensive and only protects the lender.
- It will rapidly drain your equity and can lead to a loan default.
\n\nIf there is one absolute rule you must follow when you have a reverse mortgage, it is this: Never let your homeowners insurance lapse.
If you fail to pay your premium, or if your insurance company drops you (perhaps because you live in a high-wildfire risk area), you must secure a new policy immediately. If you do not, the lender will invoke a terrifying provision known as Forced-Placed Insurance.
What is Forced-Placed Insurance?
When your insurance lapses, the insurance company notifies your reverse mortgage servicer. The servicer will send you warning letters demanding proof of new coverage.
If you ignore the letters, the lender will buy an insurance policy on your behalf to protect their collateral. This is forced-placed (or lender-placed) insurance.
Why is it so Dangerous?
1. Astronomical Costs
Forced-placed insurance is not shopped around for a competitive rate. The lender simply uses their designated provider. These policies often cost two to five times more than standard market rates. If your normal policy was $1,500 a year, a forced-placed policy might be $6,000 a year.
2. Zero Personal Protection
While you are paying the massive premium, the policy provides you with absolutely zero benefits. - It covers the structure of the home up to the loan balance, protecting the lender. - It does not cover your personal belongings (furniture, jewelry, electronics). - It does not provide personal liability coverage if someone is injured on your property.
3. Rapid Equity Drain
The lender does not ask you to write a check for the $6,000 premium. They simply add it to your reverse mortgage loan balance. Because the loan is negatively amortizing, that $6,000 immediately begins accruing interest. Over just a few years, forced-placed insurance can drain tens of thousands of dollars of your home equity.
The Path to Default
Lenders do not want to manage forced-placed insurance indefinitely. If you remain on a forced-placed policy for an extended period, the lender will eventually declare your loan in default for failing to maintain standard hazard insurance. This will trigger the loan becoming due and payable, ultimately leading to foreclosure.
If your insurance company drops you, do whatever it takes to find a new, private policy, even if you have to resort to state-run "insurer of last resort" programs (like the FAIR Plan in California or Citizens in Florida). Never rely on the lender to insure the home.\n