Deciphering loan contracts and insurance policies can be difficult, and figuring out the difference between loan amounts and insured amounts can be complicated. However, understanding the difference is critical in obtaining the right protection. Here's what you need to know.
Loan Versus Insured Amount
The term "loan amount" refers to the amount of money you borrow and agree to repay the lender. This amount often includes more than just the amount of money you receive, however.
It can also include such things as loan fees, points and sometimes even closing costs.
Your loan amount can differ significantly from your insured amount, which is the amount of insurance coverage you have as stated in your policy.
Auto Insurance
When comparing loan amount with insured amount, it helps to consider these numbers in terms of money paid versus money received in the event of a claim.
For example, you might owe your lender a total of $20,000. However, your automobile insurance coverage typically covers the cash value of your vehicle. If that amount is $15,000, there is a $5,000 difference between your loan amount and your insured amount.
In the event of a claim, while you might collect the full $15,000 cash value, you’d still face repayment of the full $20,000 on your loan.
For full protection of the loan amount, you would need gap insurance in addition to a standard auto insurance policy. Gap insurance covers the difference between the amount of money you still owe and the insured amount as determined by your policy.
Home Insurance
The same factors apply when it comes to home insurance. While you might have a mortgage loan for $200,000, your home insurance may only cover cash value or replacement value for your home.
With cash value policies, you get the current market value for your home and anything else covered. Replacement value policies do cover the cost of replacing your home and belongings, but that amount may not equal your loan amount.
If the cost to replace your home is $150,000, that leaves you with a $50,000 deficit.
A Solution
Depending on your financial situation, you may benefit from securing insurance that covers your full loan amount, repaying everything you owe in the event of a claim.
In fact, some lenders require borrowers to obtain insurance that covers the full loan amount, protecting you, the borrower and the lender from financial loss in the event of a claim.
There's more to buying insurance than just seeking coverage. You need the right amount of coverage for your property. An insurance agent can help you choose the right policy for your unique needs.
