8 min read
Jan 15, 2025
Loan Balance vs Replacement Cost Coverage
A critical danger of force placed insurance is how the coverage limit is calculated.
Loan Balance Limits
Lenders are primarily concerned with the money you owe them. Some force placed policies are written to cover only the unpaid principal balance of your loan.
Example: Your home costs $400,000 to rebuild, but you only owe $150,000. The force placed policy might only cover $150,000. If your home is destroyed, the bank gets paid off, and you are left with a pile of ash and $0 to rebuild.
Replacement Cost
Standard insurance covers the Replacement Cost of the home, regardless of how much you owe. This ensures you can actually rebuild your life.
Frequently Asked Questions
How do I know which limit I have?
Check the "Notice of Placement" letter. It will state the coverage amount. If it matches your loan balance exactly, you are likely underinsured.
Related Posts
How to remove force placed homeowner insurance
A Simple Exit Plan That Often Works
Once you understand how you arrived at force placed coverage, the next goal is usually to replace it and restore full protection.
01
Secure New Coverage
Shop for a policy that fits your specific situation, whether through standard insurers or high-risk "excess and surplus" markets.
Ensure your new coverage restores the personal property and liability protection that force-placed policies often omit, and verify that dwelling limits are based on replacement cost rather than just your loan balance.
02
Submit Proof
To cancel the lender’s policy, you must provide a complete proof of insurance package.
This typically includes a full declarations page and the servicer's specific mortgagee clause—including your loan number—to prove your coverage meets the minimum requirements of your mortgage contract.
03
Confirm Cancellation
Once your servicer accepts the proof, they will typically cancel the force-placed policy and issue a pro-rated refund to your escrow account.
Monitor your account to ensure the refund is applied and that your monthly mortgage payment is recalculated to reflect the lower insurance costs.