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What happens when you stop paying an insurance premium?

Many Americans face financial hardships, so not paying your auto insurance or home insurance premium might seem like a temporary or permanent fix. But should this ever be considered when you’re in a cash crunch?

No way, experts say. Why? First of all, you're left unprotected in case something bad happens, such as a wreck or a fire. Furthermore, doing so could result in insurance rate increases, denial of coverage or even loss of your driver's license.

insurance_premiumSimply put: If you don't pay your premium when it's due, your auto or home insurance policy usually is canceled within 30 days, says John Koch, owner of Koch Financial Group in New Jersey. Plus, depending on the policy terms, unpaid auto or home insurance premiums could be turned over to a collection agency, potentially harming your credit record.

Here are seven tips if you find yourself in a financial bind but want to keep your insurance coverage:

1. Review your policies.

Make sure you’re not paying for duplicate coverage. For instance, many auto insurance policies include coverage of medical benefits for accident injuries. If you have good health insurance coverage, you may be able to reduce the amount of medical coverage on your auto insurance policy or remove it altogether.

2. Raise the deductible for your auto or home insurance.

“It’s not wise to file small claims anyway, because it makes your premium go up,” says Amy Bach, executive director of United Policyholders, a nonprofit consumer advocacy group. “Save your insurance for things you really can’t afford, so that it’s worth carrying a higher deductible.” For example, someone who pays $100 a month for homeowner’s insurance and raises the deductible from $500 to $1,000 could save at least $100 a year. Auto insurance works much the same way.

3. Ditch comprehensive and collision coverage for cars that don't need it.

Optional comprehensive coverage pays for damage caused by such things as vandalism or fire. Optional collision coverage kicks in when your car hits another object, such as a vehicle or a tree. Dropping the comprehensive and collision coverage and sticking with liability coverage -- mandated in 49 states -- could make sense if you're driving an older, less valuable car. Liability coverage pays only for damage you do to other people's property, such as a car or a fence; damage to your car isn't covered.

4. Shop around.

Compare quotes from several insurance companies and insurance comparison websites to find savings.

5. Combine policies.

Look into carrying auto and home insurance with the same company for a potential discount. Discounts generally range from 5 percent to 25 percent.

6. Drive safely.

A clean driving record could lead to "safe driver" discounts of hundreds or even thousands of dollars a year.

7. Pay on time.

If you always pay your insurance bill promptly, you may qualify for a “continuous payment" discount.

Uninsured motorists

Despite the potential harm, millions of Americans go without auto insurance.

Even though laws require motorists to carry basic liability insurance in every state except New Hampshire and banks require a certain amount of auto insurance if you've got a car loan, roughly one of every seven drivers nationwide lacks coverage, according to a 2011 study by the Insurance Research Council.

“The percentage of uninsured motorists does seem to follow economic conditions, particularly unemployment,” says David Corum, vice president of the Insurance Research Council.

No coverage for your casa

Most mortgage companies require you to carry home insurance as a condition of your home loan; the insurance payment typically is included in your escrow. But if your home is paid off, you're free to get rid of your home insurance; however, experts recommend against doing that. According to a 2009 study by the Insurance Research Council, 5 percent of homeowners said they had dropped their home insurance as a result of the economic downturn.

If a homeowner stops paying the mortgage (and, with it, the home insurance), the lender can impose “force placed” insurance. “Forced place” insurance typically is paid upfront by the mortgage company and added to the cost of the mortgage. This insurance is less comprehensive than a typical homeowner’s policy but “two to four times more expensive,” says Bach, the United Policyholders executive.

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