Escrow vs. Direct Billing for Rental Property Insurance

For rental property owners, a mortgage payment is a lump sum that typically covers four items: mortgage principal, mortgage interest, property taxes, and landlord insurance. Many landlords have their mortgage companies pay their insurance premiums through an escrow account — a setup known as mortgagee billing. Others choose to pay their premiums directly to the insurance carrier. 

How you pay your landlord insurance premiums depends on your mortgage terms and your own preferences. In this article, we’ll share the pros and cons of paying insurance through escrow billing versus direct billing and key factors to consider in your decision. 

What is mortgagee billing?

With mortgagee billing, your mortgage company is responsible for paying your annual property insurance premium on your behalf — using funds from your monthly mortgage payments. 

Your mortgage company sets up an escrow account to manage cash to cover your premium and any other costs that the mortgage company pays on your behalf, such as property taxes. Many mortgage companies require this setup if you make a down payment of less than 20%. 

Wait… remind me what an escrow account is? 

An escrow account is a bank account that’s set up by your mortgage company, usually at the time of closing on a new property. The mortgage company puts a portion of your monthly mortgage payment into the escrow account to cover the costs of property taxes and property insurance, and any other expenses that the mortgage company is responsible for. The funds are held in escrow until the bill is due. 

What are the pros and cons of paying landlord insurance through escrow?

Here are the upsides of having your mortgage company pay your property insurance on your behalf: 

• Streamline monthly payments: Landlords who opt for escrow billing likely do it for convenience. With mortgagee billing, you make one monthly payment to cover multiple expenses (mortgage principal and interest, landlord insurance premiums, and property taxes). That means you have fewer bills to manage, and you avoid having to mail more than one check or track multiple receipts. 
• Set it and forget it: The mortgage company is responsible for paying your insurance premium and taxes, so you don’t have to worry about remembering their due dates or having enough funds in your bank account. 
• No need to set money aside: Because the costs are built into your monthly mortgage payment, you don’t need to think about setting aside funds to cover your insurance premium and taxes. When you pay your insurance directly, you have to manage your own cash — and if your tenant pays rent late the month your premium is due, then you have to make sure you have enough funds to cover your insurance payment. 
• Avoid installment fees: Your mortgage company pays your annual insurance premium all at once, which means you avoid fees that insurance companies charge if you choose to make smaller installment payments on a monthly or quarterly basis. 

That said, there are some factors to carefully consider when paying for rental property insurance through escrow, and many landlords prefer to pay directly to their carriers. 

• Less control: With mortgagee billing, you don’t have control over when your property taxes or insurance premiums are paid — you have to trust that your mortgage company is on top of it. You also don’t get to choose whether to pay monthly, quarterly, or semiannually, since mortgage companies generally pay insurance premiums on an annual basis. In fact, many carriers require annual premium payments when using mortgagee billing. 
• Less visibility: Depending on your mortgage lender, you may not be able to view your escrow account to check the balance or confirm payments were made on time. Instead, mortgage companies may just send an annual statement for your escrow account. You also may not notice if your insurance rates go up, since you’re not paying the premiums yourself and aren’t as directly connected with the year-over-year premium. 
• Can’t choose payment method: If you’re someone who likes to put different expenses across different credit cards to earn rewards, mortgagee billing may not be right for you. Landlords paying for insurance premiums through escrow can’t choose a specific payment method (e.g., credit card, debit card, or check) — it’s simply whatever method they use for their mortgage payment as the premium is part of that money paid into the escrow account. 
• Can’t earn interest: Some landlords set aside the cash they’re planning to use to pay property taxes and insurance in a high-yield bank account to earn interest — which you might miss out on with mortgagee billing as lenders are not required to pay out interest on escrow accounts. (That said, today’s interest rates don’t offer much of a return.)
• More coordination: While your mortgage company is responsible for insurance payments, it’s your job to keep your insurance carrier and mortgage company up to date. If there are any changes to your loan or policy, don’t count on these third parties to communicate and coordinate with each other. (More on that in the next section!)

What happens to my escrow insurance payments if my mortgage is sold to another bank?

It’s fairly common for mortgages to get sold to another lender, so consider this scenario: 

After your loan is sold, your mortgage company changes. But the old mortgage company doesn’t tell your insurance company about the change, so the insurance company sends the bill to the old mortgage company. As a result, the new mortgage company never receives the bill, and doesn’t make the payment — meaning your insurance coverage lapses. That means you have to go through all the hassle and paperwork of reinstating your insurance policy. 

Even if you figure out what happened and want to pay the premium yourself, it’s harder for you to step in and fix it in an escrow billing setup — and you don’t want to risk double paying. 

With that in mind, if your mortgage company changes, don’t ever assume that your old mortgage company will take care of communicating the change to your insurance carrier. 

Be proactive in contacting your insurance carrier about any changes to prevent any missed payments. When you receive a notification in writing that your mortgage was sold to another company, contact your insurance agent immediately and provide the new mortgage company information so they can update the mortgagee clause in your policy. The insurance company will then send you a new declarations page with the new lender details. 

How to switch landlord insurance carriers with mortgagee billing

If you decide to switch insurance carriers and continue paying your premium through escrow, make sure your mortgage lender knows which insurance company to send your payment to.

Once you’ve chosen your new carrier, they’ll ask for your mortgage company’s information so they can add it to your new policy. The mortgagee clause includes your lender’s official name and the address that all policy documents and bills should be sent to (this address may differ from your lender’s business address).

Then, don’t forget to cancel your previous insurance policy and note the cancelation effective date so you can align that with your new policy. 

Finally, inform your mortgage company that you switched insurers. Provide the new carrier details, your policy number, effective date and your new declarations page. 

Account for property insurance payments in Azibo

Whether you pay your insurance premiums through escrow or make payments directly to your carrier, landlords can use Azibo’s suite of accounting tools to save time and stay organized. Here’s how it works in both insurance payment setups: 

Mortgagee billing

Use Azibo to split your mortgage payment transactions into  principal, interest, taxes, and insurance. Then tag each item by Schedule E category and assign them to a rental property to simplify tax prep.

Direct billing  

If paying your insurance premiums directly, you can use your Azibo account to schedule one-time or recurring ACH payments from your bank account to your insurance carrier or provider, and then tag those transactions by Schedule E category and assign them to a rental property. 

We recommend setting up rules in your accounting software to automatically tag transactions by category and assign them to properties. You can also make bulk edits to multiple transactions at once, including adding category or property tags or splitting transactions. For example, you can split and categorize 12 months’ of mortgage payments into principal, interests, and escrows in one step.

The takeaway: Escrow vs. direct billing for landlord insurance

If you have the choice between paying property insurance through an escrow account set up by your mortgage or paying your premiums directly, your decision comes down to your own preferences. 

Landlords should weigh the pros and cons of each — and decide whether they ultimately want to have the control and responsibility of paying their own insurance bills, or the control and responsibility of communicating with their carrier and mortgage company whenever there are any changes. 

Azibo Insurance Services LLC, a wholly owned subsidiary of Azibo Inc, is a licensed insurance producer. Contact us to discuss your specific insurance needs.

Disclaimer: The information provided in this post does not, and is not intended to, constitute insurance advice; instead, all information, content, and materials are for general informational purposes only. This content may not constitute the most up-to-date insurance information. Readers must contact a licensed insurance agent or company to obtain quotes, advice, and guidance with respect to any insurance matter. No reader, user, or browser of this article should act or refrain from acting on the basis of information herein without first seeking the advice of a licensed insurance producer.