VSI insurance falls under two coverage types: tangible property, and default or credit loss. Tangible property coverage includes just the lender's interest in the tangible property, otherwise known as collateral. For example, if you purchase a boat for $5,000 and obtain a loan for half the amount, $2,500, this coverage only covers up to $2,500 of the boat's value if it becomes damaged. Only the lender can submit a claim for his loss to the VSI insurance provider. The buyer receives nothing under VSI insurance for tangible property.
Default or Credit Loss
The other type of VSI coverage, default or credit loss, basically ensures that the buyer of a vehicle pays their portion of the loan in full and doesn't default on the loan payments. When a buyer defaults on the loan and the vehicle is repossessed, the lender is able to make a claim for reimbursement for his portion of the loan from the VSI insurance provider. The lender can only receive the value of the property at the time of repossession less the amount paid by the borrower. In essence, this type of insurance is considered a blanket coverage policy. The lender typically pays the insurer a monthly premium for this type of coverage, although in some states the lender is permitted to pass the costs to the buyer either in the loan origination fee or in monthly loan payments. Again, the buyer receives nothing for this coverage.
VSI is generally required coverage of vehicles purchased with financing help from a lender.
Lenders are required to disclose information related to VSI insurance to buyers before the point of sale. In addition, VSI must be calculated as part of the finance charge and included when estimating the loan's annual percentage rate (APR). However, the cost of VSI insurance can't be factored into the total loan amount being financed by the borrower.
It's recommended that vehicle buyers purchase additional coverage and don't rely only on VSI insurance, because this coverage is strictly intended to cover the lender's portion of the vehicle, not the whole vehicle. In addition, premium rates tend to increase with every claim made, and over time may become too expensive for the buyer to maintain. In cases when the insurance is canceled, the buyer may be limited in finding replacement coverage, because he will now be perceived as high-risk by other insurance companies.