Collateral protection insurance (CPI)
What is collateral protection insurance (CPI)?
Collateral protection insurance (CPI) is a type of insurance placed by a lender when a borrower fails to maintain the required insurance on a financed asset, such as automobiles or homes. CPI is designed to protect the lender’s financial interest, not the borrower’s in case the collateral is damaged or lost.
If you finance a vehicle or property, you usually agree to keep it insured. Lenders require full coverage car insurance to protect their interests in the collateral until the vehicle is owned outright. If your insurance lapses and you don’t send proof, your lender may add a CPI policy to your loan and charge you for it.
How does CPI insurance work?
When you take out a loan, you agree to insure the collateral — the thing you bought with the loan, like a car. If you don’t keep your insurance active or fail to show proof to your lender, they may buy CPI and add the cost to your loan balance.
CPI is typically more expensive than regular insurance and may offer limited protection. It’s not meant to cover your personal injuries or liability just the lender’s risk of losing money if the asset is damaged or destroyed.
Why lenders use CPI
Lenders use CPI to make sure the property they financed is protected at all times. If the collateral gets damaged and there’s no insurance in place, the lender could lose money, especially if you default on the loan. It’s crucial for borrowers to provide proof of insurance with the lienholder identified so they don’t put CPI in place to safeguard the asset instead.
What does CPI cover?
CPI usually covers:
- Physical damage to the car or property you financed
- Loss from fire, theft or specific covered perils
- The lender’s interest only, not your personal or financial needs
Depending on the policy, CPI may include:
- Collision and comprehensive coverage
- Limited protection in case of a total loss
It does not typically cover:
- Liability for injuries or property damage to others
- Medical payments or personal protection
- Towing, rental or roadside assistance
CPI coverage limitations
CPI policies are not designed to fully replace your personal insurance. You may still be financially responsible for repairs, injuries, or accidents that CPI doesn’t cover. While CPI can cover the costs to repair collateral such as an automobile, it may not cover all repair expenses, leaving some costs to the borrower.
It’s important to remember: CPI protects the lender, not you.
How does CPI impact you?
If CPI is added to your loan:
- Your monthly payment may go up
- Your loan balance will increase
- You may owe interest on the cost of CPI/li>
- It may not meet your state’s minimum insurance requirements
- You may be left with unexpected out-of-pocket costs after an accident
In some cases, CPI can trigger loan default, repossession, or credit score issues if unpaid.
Your responsibilities as a borrower
To avoid CPI, you must:
- Keep the required insurance (auto, homeowners, etc.) active
- List the lender as a loss payee on your insurance policy
- Provide proof of coverage and verify it when requested by your lender
If your insurance is canceled, notify your lender and replace it immediately to avoid a CPI charge.
When does CPI take effect?
CPI usually takes effect:
- After your personal insurance lapses or is canceled
- If you fail to provide updated proof of insurance
- After a notice period from your lender (often 30 days)
It is crucial to obtain the necessary insurance coverage to avoid CPI. This includes both personal insurance and (CPI) to protect the credit union's interests. If you don’t have the right insurance, you could end up paying more out of pocket.
Some lenders send warning letters or emails before CPI is applied. Ignoring those notices can result in extra costs.
How is CPI cost determined?
CPI is typically more expensive than personal insurance. The cost depends on:
- The value of the financed property
- Risk factors like location or loan history
- The lender’s selected coverage and provider
Shopping for your own insurance gives you better options and often better prices than CPI. By comparing offers, buyers can potentially find more economical choices compared to collateral protection insurance, which often has non-negotiable premiums.
Unlike shopping for your own policy, you don’t get to choose the price — the lender does, and you’re billed for it.
How to avoid or remove CPI
If CPI has been added to your loan, you can remove it by:
- Buying personal insurance that meets your lender’s requirements
- Listing the lender as a loss payee on your policy
- Sending proof of coverage to your lender
Send proof of coverage to your lender as soon as possible, it could save you money.
Once your lender receives valid proof, they may cancel the CPI and issue a refund for any unused portion of the premium.
What happens if you don’t pay the CPI put in place?
If you don’t pay the cost of CPI:
- The amount is added to your loan and accrues interest
- Your loan may be considered in default
- The lender may provide insurance coverage if you fail to secure your own insurance
- You could lose your vehicle or property through repossession
- It could hurt your credit score
Collateral protection vs. force-placed insurance
These terms are often used interchangeably, but here’s the difference:
- (CPI) typically applies to automobiles or personal property
- Force-placed insurance is a broader term often used in home loans or mortgages
Both are lender-placed policies that protect the lender when you don’t maintain your own insurance. Both are usually more expensive and offer less coverage than standard policies.
Examples of when CPI is used
- You finance a car and forget to renew your auto insurance — the lender adds CPI and increases your monthly loan payment.
- An insurance company provides CPI to lenders, enabling them to manage their risk from losses when borrowers fail to maintain required insurance.
- You cancel your homeowners insurance without telling your mortgage lender — they place force-placed insurance on your home to protect their investment.
Frequently asked questions:
How much does collateral protection insurance cost?
The cost of collateral protection insurance (CPI) can vary significantly based on several factors, including the value of the financed asset, the lender's chosen coverage, and the insurance provider. That being said, some companies might price this insurance around $150 monthly, whereas others could demand upwards of $500 or more. Generally, costs fall between $200 and $300.
Sources:
https://insurify.com/car-insurance/coverage/collateral-protection-insurance/