Homeowners change their insurance carriers for a variety of reasons. Perhaps your provider has increased your premium or doesn’t offer good discount programs. Regardless of why you want to make the switch, you need to plan ahead before purchasing a policy with another insurer.
Price is just one factor in choosing a new homeowners insurance company. You also need to consider the types of coverage a provider offers and if the limits of its policies will fulfill your needs. Before diving in with a new policy, you must also know when your current coverage ends and the insurer’s cancellation requirements. And, if you pay your homeowners insurance through an escrow account, you’ll need to know how to transfer your coverage to a new carrier without missing a premium payment.
It might seem daunting, but it’s not. Follow along and we’ll show you how to make the switch.
What are home insurance escrow terms?
When you finance a home, your lender will likely require you to open an escrow account to comply with the terms of the mortgage. Your monthly mortgage payment will include funds to pay the loan’s principal and interest, real estate taxes and your homeowners insurance. When applicable, the mortgage company may also use escrow funds to make private mortgage insurance payments and pay homeowners association fees.
Each month, your principal and interest payment will go directly to the entity that holds the mortgage. The lender will deposit funds for your insurance premium and property taxes into the escrow and make the payments for you when they are due.
If you purchase a new home, the lender will require you to deposit two months’ worth of property tax and homeowners insurance payments into the escrow account at closing. After closing, you’ll make regular monthly escrow payments, each equal to 1/12th of the tax and insurance costs.
Mortgage lenders require escrow accounts to help minimize risk, because your house is the collateral that secures the mortgage. If you fail to pay your property taxes, the government can place a lien on your home. Likewise, if you don’t pay your homeowners premium and your home burns to the ground, the lender would lose the property that secured the loan.
Paying your homeowners insurance through an escrow account doesn’t make switching insurance more difficult. If you find a better home insurance rate with another provider, you can simply apply for the coverage. The new insurer will send proof of insurance and the homeowners insurance bill to your lender and they will update the payment details in your escrow account. If the new policy has a lower rate than the old policy, the amount of your mortgage bill will likely reflect the difference.
How much does it cost to switch a home insurance policy with an escrow account?
When paying your home insurance premium through an escrow account, you often don’t need to make the first payment out of pocket. Usually, the lender will use funds from the escrow account to make the required initial payment. However, it’s important to monitor your escrow account to ensure all insurance and tax payments are made on time. The lender should also send you an annual escrow statement.
Paying homeowners insurance through an escrow account doesn’t affect your insurance premium. You’ll pay the same rate as if you made the payments yourself. Essentially, an escrow works like a checking or savings account. The bank may charge you a monthly service fee, similar to the amount you pay for your other deposit accounts. And, the mortgage lender or servicing company may charge a minimal escrow fee to cover its administrative costs. But, paying your insurance premium through an escrow account doesn’t significantly increase your annual costs.
Lenders pay insurance premiums and property taxes through the escrow account. If you see a significant increase in the amount you must pay to escrow, investigate to find the cause. Oftentimes, the lender might increase the escrow payment due to an expected increase in your property taxes. Or, your insurance premium may increase after you file a claim. If your escrow account doesn’t have sufficient funds to make a tax or insurance payment, the servicer will usually make the payment anyway, then request an escrow deposit from you. That’s one of the great advantages of having an escrow account.
Typically, you can terminate a mortgage escrow on a conventional loan after you own 20% equity in your home if you have a 680 or higher FICO credit score. For a VA loan, you must hold 10% equity with a FICO score of 720 or higher. However, you may choose to keep your escrow account to ensure your prompt insurance and property tax payments.
What will the new insurance company need to know in order to switch providers?
Switching home insurance providers is probably easier than you might think, even if you pay your premium through an escrow account.
- Examine the coverage you currently have and determine if you need additional protection. A comprehensive homeowners policy should include additional living expenses, dwelling, liability and personal property coverages. If you own expensive personal belongings, like jewelry or musical instruments, you might need to find a new insurer that can provide additional coverage.
- Shop around. Look for insurers that offer all the coverages you need, plus a good selection of optional coverages to maximize your protection. Also look for a provider that offers discounts.
- When considering an insurance company, check its financial ratings at the AM Best, Moody’s and Standard and Poor’s websites. Also review the most recent U.S. Home Insurance Study at the J.D. Power website and the carrier’s consumer rating with the Better Business Bureau.
- Once you find the right policy, apply for it. Carefully select the date the policy will take effect. Don’t allow your home insurance coverage to lapse, even for one day.
- Notify your current insurance company that you want to cancel your policy. It’s best to switch at the end of a policy term to avoid a cancellation fee. If you need to switch in the middle of a policy term, find out if penalties or fees will apply. The terms of your policy should outline the cancellation process. Oftentimes, you must notify the insurer 30 to 60 days in advance, so it pays to start shopping for a new carrier well before the end of your policy term.
- Contact your mortgage lender to update your insurance information. The new insurer will take your escrow information in the application process and will send proof of insurance and the premium bill to your lender.