Understanding your insurance binder

Key points

• An insurance binder acts as a placeholder for a formal insurance policy.
• You may need to provide a lender with an insurance binder in order to take possession of an asset used to secure the loan.
• Insurance binders don’t guarantee long term insurance coverage.

Life tends to throw curveballs our way more often than we’d like. This is where insurance can step in to save the day. While not always required, there are times when you may need to have auto insurance, homeowners insurance or other types of insurance in order to secure a loan or remain compliant with local laws.

When you need to prove insurance coverage, but are still waiting for your policy to be issued, an insurance binder can help bridge that gap.

Insurance binder defined

When someone buys a new car or a home, they generally need to have an insurance policy secured the day they assume ownership. This is especially true if they took out a loan to make the purchase.

An insurance binder can help bridge the gap between applying for a new insurance policy and officially having one. Essentially, an insurance binder acts as a placeholder for a formal insurance policy during the underwriting process, which can last days or weeks. Once you have an insurance binder, you have evidence that you do in fact have coverage and can present it to a lender or anyone else who requires proof of insurance.

Your insurance company may not offer insurance binders and the practice is becoming less common as insurance companies are now able to issue policies faster than in the past. Your insurance provider may even choose to write a policy with a future effective date on it, which can make it possible to secure your policy before you take over ownership of a house or car.

“It’s important because it outlines what will happen if you don’t pay your premiums on time,” says Brian Greenberg, founder and president of Insurist, an insurance agency. “If you miss a payment on your insurance policy, the insurance company may cancel your coverage and charge you a late fee. The binder helps protect you from this by outlining the consequences for missing payments and ensuring that you are aware of the consequences before you sign up for the insurance in the first place.”

What’s included in an insurance binder?

Generally an insurance binder is a simple one or two page document that contains the following information:

• Policyholder’s name.
• Policy holder’s address.
• Policy number.
• Start and end dates of the policy.
• Insurance binder expiration date.
• Name of insurance provider.
• Address of insurance provider.
• Deductibles.
• Endorsements.
• Additional insureds.
• Name of the agent who issued the binder.

Who needs an insurance binder?

It’s most common to require an insurance binder when you use a loan to make a purchase that is backed by a type of collateral. Essentially, the lender wants to ensure you have the proper insurance coverage before you take ownership of the collateral. That way if something happens to the collateral, they know it’s insured.

For example, if you buy a home using a mortgage loan and it unfortunately burns to the ground. You’ll need homeowners insurance to cover the costs of rebuilding the home. If you don’t have homeowners insurance and can’t afford to rebuild your home, then the lender risks losing the collateral that backs the loan.

If you’re buying a new home, boat, car or other major purchase using a secured loan, it’s very likely you’ll either need to have an insurance policy in place before you take ownership or you will need an insurance binder to prove you have coverage.

Lenders aren’t the only ones who may require an insurance binder. For example, it’s illegal in most states to drive a car without having an insurance policy. Even if you buy a car in cash, the dealership may not let you drive the car off the lot without proving you have auto insurance coverage.

What’s not in the binder?

Each company may issue their insurance binders differently, but Greenberg says there’s one detail they often don’t add to binders that is worth knowing.

“The most important information that’s not included in an insurance binder is the coverage limits,” Greenberg says. “When you’re shopping for insurance, you should always ask your agent what the policy limits are. If they don’t know, they should be able to find out for you and make sure that you’ve got the right coverage.”

What if you never got the policy? How do I get one?

If you weren’t provided with an insurance binder, how do you get one? The solution here is simple, all you have to do is request one from your insurance company.

“The best way to do this is by contacting your insurance company with a few questions about their products and services, such as what kind of coverage you need, what kind of deductible applies to your policy, who is responsible for paying medical bills if a member of your family gets sick, and so on,” Greenberg says. “You’ll want to make sure that they’re familiar with the terms of your policy before they write up an insurance binder for you.”

Remember — an insurance binder may not always be necessary. In many cases the insurance company will issue the policy immediately or so quickly you don’t need to get your hands on a temporary insurance binder. You’re usually only issued one when it’s expected to take a while to issue the policy.

Nowadays it’s much more common to receive a digital copy of an insurance binder which makes it easier to share it quickly with a lender or other interested party. You can request a hard copy to be sent via mail if you want a physical copy for your records.

Understanding your insurance binder FAQs