What is Collateral Protection Insurance and How Does It Work?
Last Updated on May 10, 2020
Collateral protection insurance is a type of car insurance that protects a vehicle if a borrower fails to insure that vehicle.
This type of insurance is also known as lender-placed insurance or forced car insurance. Keep reading to learn everything you need to know about collateral protection insurance and how it works.
What is Collateral Protection Insurance?
Collateral protection insurance (CPI) is enacted when an individual who takes out an auto loan fails to adequately insure a vehicle.
Because the lender – like the bank or car dealership – wants to protect its collateral, the lender will force its own coverage onto the vehicle. Remember: the lender technically still owns the vehicle, and they want that vehicle protected by an insurance policy. That’s why collateral protection auto insurance exists.
How Can Collateral Protection Insurance Protect You?
When you sign a loan on a vehicle, you agree to certain requirements. You agree to make loan payments on time, for example, and to maintain the vehicle for the duration of the loan.
All loan contracts also require you to insure the vehicle. After all, the vehicle is acting as collateral on the loan. That’s why the lender will require you to show proof of insurance.
Most lenders require you to show proof of insurance shortly after buying the vehicle. The lender will check the documents to verify your insurance coverage.
If the lender finds your insurance coverage to be valid and adequate, then the lender will not add collateral protection coverage. If you did not get insurance, or if the insurance is not valid, then the lender has the right to add CPI to your loan payments.
You can’t just buy car insurance today then cancel it tomorrow: most lenders use insurance tracking programs to ensure a vehicle remains insured for the entire loan period. You cannot remove the insurance or lower it below the agreed-upon limits.
Most lenders will contact you before adding collateral protection insurance. Furthermore, insurers cannot add coverage outside of the requirements of your loan agreement. If your loan requires you to have comprehensive and collision coverage of $100,000 with a $500 deductible, for example, then a lender cannot force you to pay for a policy with $200,000 of coverage and a $1,000 deductible.
How Is CPI Different From Ordinary Car Insurance?
Collateral protection insurance works similar to ordinary car insurance. It covers physical damage to your own vehicle, but it can also cover medical expenses and liability. Typically, collateral protection insurance is made up of:
Collision Coverage: Protects a vehicle against damage caused by striking a fixed object, like a wall or another vehicle.
Comprehensive Coverage: Protects a vehicle against non-accident-related damages like theft, vandalism, animals, and weather-related damages.
Liability Coverage: Collateral protection insurance will cover your liability. If you injure someone or damage property in an accident, then your collateral protection insurance will cover medical expenses, legal costs, and other damages resulting from the incident.
Remaining Auto Loan Balance: Collateral protection insurance will also cover the remaining auto loan balance. If your vehicle is beyond repair after an accident, then your insurance covers the full amount remaining on your loan.
How Much Does Collateral Protection Insurance Cost?
Collateral protection insurance rates vary widely based on several factors. You’ll pay different rates for CPI based on your age, driving record, state insurance laws, coverage requirements, vehicle value, and other factors.
However, collateral protection insurance is typically more expensive than a standard car insurance policy.
If you normally pay $80 per month for car insurance, then collateral protection insurance may cost $150 per month. This is one of the controversial parts of collateral protection insurance. Some shady dealerships and lenders will force drivers to have excessive insurance limits, then charge exorbitant collateral protection insurance premiums when drivers fail to meet those limits.
You may also have to ‘back pay’ your collateral protection insurance. If CPI is part of your lease agreement, and you failed to maintain adequate car insurance from the beginning of your lease, then you need to retroactively pay for any days on which you leased the car but did not carry adequate coverage. If you leased a vehicle on October 1, for example, but did not buy car insurance until November 1, then the lender will require you to retroactively pay for collateral protection insurance throughout the month of October.
Can I Avoid Buying Collateral Protection Insurance?
Collateral protection insurance is expensive and restrictive. So can you avoid CPI?
Yes, you can absolutely avoid having collateral protection insurance. The best way to avoid it is to maintain car insurance that meets your lender’s insurance requirements and to keep your insurance at that level for the duration of your lease.
If you already have CPI, then the only way to remove it is to add coverage or purchase an insurance policy, then show the proof of insurance to your lender.
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Final Word on CPI
Collateral protection insurance (CPI) is a type of car insurance imposed by lenders. If you have financed or leased a vehicle, then the lender will need to protect that vehicle (the ‘collateral’) with collateral protection insurance.
You only need to pay collateral protection insurance if you do not have sufficient auto insurance coverage (or any auto insurance) on the vehicle. If you fail to maintain adequate coverage, then the lender may force you to pay for collateral protection insurance, which is why it’s also known as forced auto insurance.