Don't make this mistake with homeowners insurance

Why updating policy after paying off mortgage is so crucial

Thursday, September 27, 2007By Ilyce R. GlinkInman News

I received these comments after answering a question in a recent column about any changes that should be made on a homeowners insurance policy:

Comment: I read your recent column in the Hartford Courant. One reader asked if any changes were needed on the home's insurance policy once the mortgage was paid off.

Your answer was "no." You stated that no changes needed to be made on the insurance policy. I disagree. If a mortgage company or bank is listed as a mortgagor or loss payee on the insurance policy, then that entity should be removed from the policy once the loan is paid off.

Ilyce: If a fire or other loss results in a claim, the insurance company will issue the loss payment or settlement check for that claim payable to both the insured (the homeowner) and the mortgagor if the name has not been removed. The proper paperwork needs to be submitted to the insurance company to have the mortgage company or bank deleted from the policy. It would not have any financial interest in the home once the mortgage is paid off.

Comment: I believe your comment that nothing needs to be done is in error. The reader should have his homeowners insurance policy modified to remove the lending institution as an additional insured. Otherwise the reader would have to locate and request the lender sign off on any claim settlement checks should the property be damaged at some future date.

The reader should also request that tax and insurance bills be sent to him for payment rather than to the lending institutions' escrow accounts.

Ilyce: Loretta Worters, a spokesperson for the Insurance Information Institute, agrees it is a good idea to notify your insurance company that your mortgage has been paid off.

"When you have paid off your mortgage, the title is returned to the borrower," who is also the homeowner, she explained. The homeowner "would need to notify the insurance company that the title is now in his name, but the bank may automatically do it."

According to Worters, this is an important thing to do to smooth the claims-paying path in case you have a loss.

"If you have a loss, the check would be made out to you and to the bank because theoretically the bank owns your home," she explained. If you remove the lender's name from the policy once your mortgage is paid off, only your name would be printed on the check, which helps cut down on the paperwork.

If you don't remove the bank's name, it slows down the process of getting you a check because there would be additional paperwork to complete.

"It's more of an inconvenience. The check would have to be reissued. The insurance company would probably look for proof that the loan has been paid off -- such as the title from the bank. It's not awful but it would take time. If you're looking to get a claim paid to rebuild a home after a catastrophe, you want to get it paid as quickly as possible," she said.

When you refinance your mortgage, you'll need to notify your insurance company as well, says Worters, so that new lender is named on the homeowners insurance policy. Typically, the lender takes this step for you.

Worters said there are typically two areas where problems creep up when it comes to homeowners insurance and mortgages.

Ninety-eight percent of homeowners have homeowners insurance because the lender requires it. But once a home loan has been paid off, some homeowners decide they no longer want to pay for homeowners insurance.

"It's extremely dangerous, because if they experience a loss after the policy lapses, they are on their own and they may not be aware of it. Banks automatically include homeowners insurance as part of the package on many mortgages. So you may not even be aware of your premium or your coverage," Worters explained. "But once your home is paid in full, you will no longer get notices about homeowners insurance and it could slip through the cracks."

The best way to contact your insurance company is to call first, and then follow up in writing. Be sure to keep a copy of the letter, which you should send via registered mail, return receipt requested.