What to Do With Home Insurance Refund? A Wise Guide To Your Insurance

Home insurance refund check is the amount of money that you receive from your previous home insurance company when you switch to a new one. It is usually a prorated refund for the unused portion of your premium that you paid in advance.

For example, if you paid your annual premium of $1,200 in January and switched to a new insurer in July, you would get a refund check of $600 for the remaining six months.

 

Changing home insurance policy
Changing Homeowners Insurance After a Claim | PolicyScout

But what should you do with this refund check? Should you spend it on something else or deposit it back to your escrow account? Here are some tips on how to handle your home insurance refund check wisely.

READ ALSO : Do You Cancel Home Insurance When Selling Your House? What You Need To Know

Deposit It Back to Your Escrow Account

The most recommended option is to deposit your refund check back to your escrow account as soon as possible. Your escrow account is the account that your mortgage lender uses to pay your property taxes and home insurance on your behalf.

When you switch your home insurance, your lender will adjust your escrow payments accordingly and pay the new insurer from your escrow account.

However, if you don’t deposit your refund check back to your escrow account, you may end up with an escrow shortage or a delayed payment to your new insurer. An escrow shortage means that your escrow account does not have enough funds to cover your property taxes and home insurance.

This can result in higher monthly payments, late fees, or even penalties from your lender or local authorities.

A delayed payment to your new insurer means that your home may not be fully covered until your lender pays the new premium from your escrow account. This can expose you to financial risks in case of a loss or damage to your property.

Therefore, it is best to contact your lender and ask them how they prefer to receive your refund check.

Some lenders may allow you to deposit it electronically, mail it, or bring it in person. You should also ask for an updated escrow analysis to see how your escrow payments will change after switching your home insurance.

Use It for Other Purposes

Another option is to use your refund check for other purposes, such as paying off debts, saving for emergencies, investing for retirement, or spending on something you need or want. However, this option comes with some drawbacks and risks.

First, you will have to pay taxes on the refund check as it is considered as income by the IRS. Depending on your tax bracket and state laws, you may have to pay up to 30% of the refund amount in taxes.

Second, you will have to make up for the shortfall in your escrow account by either increasing your monthly payments or making a lump sum payment at the end of the year. This can affect your cash flow and budgeting.

Third, you will have to ensure that your new home insurance policy is paid on time and in full by either paying it yourself or setting up a direct debit from your bank account. If you fail to do so, you may lose your coverage or face cancellation fees from your new insurer.

Therefore, before using your refund check for other purposes, you should weigh the pros and cons carefully and consult with a financial adviser if needed.

How do I switch home insurances?

Switching home insurance companies can be a good way to save money and get better coverage for your property. However, it also involves getting a refund check from your previous insurer and deciding what to do with it.

The best option is to deposit it back to your escrow account as soon as possible to avoid any problems with your lender or new insurer. Alternatively, you can use it for other purposes, but be prepared to pay taxes on it and make up for the shortfall in your escrow account.

To switch home insurance companies, you need to follow some steps to make the switch smoothly and avoid any gaps or overlaps in coverage.

1.Review and evaluate your existing home insurance policy.

Check your coverage limits, deductible, endorsements, and premium. Look for any gaps or excesses in your coverage and decide what you need from your new policy.

2.Compare home insurance quotes from several insurance companies.

You can use online tools or contact agents directly to get quotes for the same coverage you want. Compare the prices, discounts, customer service, and reputation of each company.

3.Buy your new policy and cancel your old one.

Once you choose a new insurer, you can buy your new policy online or over the phone. Make sure the effective date of your new policy matches the cancellation date of your old one to avoid any lapses or overlaps in coverage.

You may have to pay a cancellation fee to your old insurer depending on your policy terms.

4.Let your mortgage lender know you switched insurers.

Your lender needs to know who your new insurer is and how much your new premium is.

You also need to send them a copy of your new policy declaration page and proof of payment. Your lender will adjust your escrow account accordingly and pay your new insurer from it.

5.Enjoy your new home insurance policy. You have successfully switched home insurance companies.

You should review your new policy periodically and update it if needed.

Conclusion

Switching home insurance can save you money and provide better coverage for your property. However, it also involves getting a refund check from your previous insurer and deciding what to do with it.

The best option is to deposit it back to your escrow account as soon as possible to avoid any problems with your lender or new insurer.

Alternatively, you can use it for other purposes, but be prepared to pay taxes on it and make up for the shortfall in your escrow account.

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