When you have a mortgage or car loan, your lender typically requires you to maintain insurance to protect their investment. If you don’t buy sufficient coverage, your lender can buy an insurance policy for you and make you pay for it.

Force-placed insurance is an insurance policy that a creditor buys on your behalf and adds to your monthly payments. Force-placed insurance can cost you big time, but it’s easily avoidable. Here’s how force-placed insurance works for auto and homeowners insurance, how to avoid it, and how to get it removed.

Learn more: How does car insurance work? The basics explained.

Force-placed insurance is a temporary homeowners or car insurance policy that a lender buys for a borrower (and charges the borrower for) if you don’t obtain proper coverage. It’s used to protect the financial interests of your lender, rather than to provide financial protection to you. It’s also referred to as lender-placed insurance, creditor-placed insurance, or collateral protection insurance.

Mortgage lenders and servicers use this type of insurance policy when you fail to maintain sufficient homeowners insurance. If you live in a flood zone and don’t have adequate flood insurance, your lender could also force-place flood insurance on your home.

Learn more: How much does flood insurance cost in every state?

You could also wind up with force-placed car insurance if your auto policy doesn’t meet your lender’s requirements. For example, if you purchased auto liability coverage (which most states require) but didn’t buy collision coverage or comprehensive coverage (which most lenders require), your car loan agreement probably says that your lender can buy force-placed insurance on your behalf.

You could find yourself on the hook for lender-placed insurance in the following circumstances:

• You cancel your homeowners or car insurance and don’t obtain a replacement policy

• You let your insurance policy lapse, which can happen as the result of late or missed payments

• Your insurer canceled or didn’t renew your coverage and you haven’t purchased a new policy

• Your insurance coverage is determined to be insufficient

• You don’t provide proof of coverage to your lender

Most lenders tack on the cost of a force-placed insurance policy to your monthly car or mortgage payment. For example, if your car payment is $300 and your lender force-places a $150-a-month insurance policy, your car payment would balloon to $450. You’ll typically also need to make backdated payments, so in the example above, if you were without insurance for four months, you’d need to make $600 worth of retroactive premium payments.

Expect the cost of force-placed insurance to be much higher than what you’d pay if you purchased your own policy. Force-placed insurance can cost up to 10 times more than a standard homeowners policy, according to the National Consumer Law Center and the Center for Economic Justice.

The exact cost of force-placed insurance will depend on a number of factors, such as the value of your home or vehicle, your state, and your lender.

Moreover, when your lender shops for coverage on your behalf, they aren’t motivated to find the lowest possible price because you’re paying the bill. In recent years, some critics have accused insurers and lenders of making excess profits from force-placed insurance.

Mortgage contracts typically require you to insure your home to protect their financial interest, as well. Since your home serves as collateral for a mortgage, lenders risk major financial losses if an uninsured home is severely damaged or destroyed and the homeowner walks away from it, leaving the mortgage unpaid.

Learn more: Homeowners insurance: What it covers and how much you'll pay

Force-placed insurance typically provides far less coverage than what you can buy on your own.

Home insurance isn’t required by law, but most banks require homeowners with a mortgage to carry hazard insurance, which covers damage to the home’s structure.

A standard homeowners policy also provides coverage for your belongings, liability protection in case you or someone in your household is sued for bodily injury or property damage, and additional living expenses to help cover costs if you have to temporarily relocate because your home is damaged.

Most force-placed home insurance policies only provide hazard insurance. They don’t include coverage for personal property, liability, or additional living expenses.

There are two types of force-placed home insurance:

1. Single-interest policies. The policy protects only your lender’s interest and limits reimbursement to the amount of the outstanding balance.

2. Dual-interest policies. The policy protects both the lender and borrower. Usually, it insures the home at replacement cost value (RCV).

Many force-placed auto insurance policies only protect your lender’s interest in your vehicle. For example, the lender may purchase collateral protection insurance (CPI) and charge you for it. This is similar to collision and comprehensive insurance because it covers the physical damage to the vehicle.

Force-placed auto insurance typically doesn’t include liability car insurance, which pays for damage and injuries to others caused by you or someone else driving your car. Liability insurance is required in nearly every state. So even with force-placed insurance on your car, you still need to buy liability insurance.

Depending on your state, you could have your driver’s license suspended if you don’t have the state-required minimum auto insurance. You could also wind up having to pay out of pocket if you’re involved in a crash that injures someone or damages another person’s property.

Read more: What happens if you don’t have car insurance?

Avoiding force-placed insurance is relatively straightforward as long as you don’t let your insurance lapse and provide proof of insurance to your lender. Follow these tips to ensure you don’t have any issues:

Make sure you understand your loan documents and contact your lender or your insurance agent if you’re not sure your coverage is sufficient.

Learn more: How to choose the right auto insurance coverage limits

Be sure to pay your policy premiums on time so you won’t have policy lapses. Also, avoid policy cancellation until you have a new insurance policy in place.

Getting your own auto insurance policy or home insurance policy is almost always cheaper than a force-placed policy, and it provides better protection. If you receive a notice of cancellation from your insurance company, take action quickly. Policy lapses can lead to force-placed insurance, and they also put you at financial risk if you’re in a car accident or a disaster strikes your home during the coverage lapse.

Contact your insurer to be sure that your lender is listed as the lienholder on your policy. Then follow up with your lender to confirm they’ve received the necessary proof of coverage.

Federal law mandates that lenders send written notice 45 days in advance stating that they intend to force-place insurance. They’re also required to send a second reminder notice at least 15 days before purchasing this policy.

A forced insurance policy is only temporary. Once you obtain proper coverage, your lender is required to cancel it. Follow these steps to remove force-placed insurance.

Your auto lender’s insurance requirements are probably different from your state’s requirements. State laws don’t require comprehensive or collision insurance, but most lenders do. Homeowners insurance isn’t mandated by law, but it’s usually required under your mortgage terms. Make sure you understand the types of coverage required, as well as the minimum amounts.

The only way to have a force-placed insurance policy removed is to buy your own coverage. You can find cheap car insurance by comparing insurance quotes from multiple companies and asking about discounts.

Learn more: Car insurance discounts: 17 ways to save

Until you’ve resolved the matter, you need to keep making your loan payments with the extra force-placed premiums. If you don’t pay, the lender could repossess your vehicle or foreclose on your home.

Step 4: Provide proof of coverage and request cancellation

Once you’ve provided proof that your home or vehicle is properly insured, your lender is required to cancel your force-placed car insurance.

Sometimes, force-placed insurance is issued by mistake. If you switched insurers, for example, it’s possible that your lender received a notice of cancellation from the old insurance company but didn’t receive proof of insurance from the new one. You’re typically entitled to a refund of force-placed insurance in these cases, so be sure to request one when you submit your documentation. If your loan company refuses, you can file a complaint with the Consumer Financial Protection Bureau.

While force-placed insurance can be costly, the issues that cause them (like a policy lapse) can lead to bigger financial problems. For example, a lapse in auto or homeowners coverage often results in higher insurance premiums because insurers see you as a bigger risk. And if your car or property is uninsured, you’ll have to pay out of pocket for any damage.

Maintaining sufficient insurance coverage and staying current on your premium payments will help you avoid force-placed insurance and a domino effect of other problems.

Lender-placed insurance isn’t good for you as a borrower because it’s intended to protect your lender’s financial interests, not yours. If your home is damaged or you’re involved in a car accident, you could incur substantial out-of-pocket costs. Even though force-placed insurance provides less coverage, premiums are usually far more expensive than you’d pay if you purchased your own policy.

Yes, if you’ve maintained proper coverage and your lender still force-placed a policy on you, you’re entitled to a refund. You can request reimbursement when you submit your insurance documents to your lender to verify that you have coverage.

Force-placed insurance tends to be expensive because your lender isn’t comparison shopping or searching for insurance discounts on your behalf. Your lender or servicer is seeking a policy that protects their interest, and they may buy a policy that provides extra coverage for them or work with insurers that provide them with financial incentives.

However, insurance companies argue that the costs of these policies are higher because they’re providing coverage even to the riskiest properties and drivers, making the potential losses higher.

Amy Danise and Tim Manni edited this article.