When to Keep Full Auto Coverage

You’ve paid off your car loan, and you’re looking for ways to save money. Your insurance company required full coverage for your vehicle while you financed, but do you need to keep that extra coverage now that you own your vehicle?

Depending on your financial situation and the value of your vehicle, cutting your coverage could make sense. Below are some tips that might help you make that decision.

What is Full Coverage Car Insurance?

Full car insurance coverage isn’t a specific type of policy, but a combination of coverage types. Every company does full coverage a little differently, but when someone mentions this type of policy, it typically includes:

• Collision Insurance: Covers damage to your vehicle in the event of an accident.
• Comprehension Insurance: Covers damages to your vehicle caused by events other than a crash, such as flood, fire, falling tree limbs, or vandalism.
• Liability Insurance: Covers injuries or damage you cause to other people or their property.

This combination of insurance protects the financier’s asset (the car they are financing for you) in the event of a loan default because of an accident or other type of loss.

Say you owe $8,000 on a car loan, and your car gets totaled in an accident. If you only had liability coverage, the insurance company wouldn’t offer any compensation for the vehicle, and you’d still be on the hook for the remaining loan balance.

With a full coverage policy, your insurance company would cover the value of your vehicle and pay your lender directly. Provided that your vehicle’s value is equivalent to (or greater than) the amount you owe on your loan, you won’t have to keep paying your loan after losing your vehicle.

Options for Owners

Even when you pay off your vehicle, opting out of full coverage car insurance isn’t a black and white situation. Sometimes it makes sense to drop down to just liability coverage, but for others – such as those with a vehicle that is regularly at risk for damage – keeping a full coverage policy is the safest option.

For example:

• You live in an area with harsh weather (regular floods, fires, hurricanes, etc).
• You live in an area with high rates of car theft or vandalism.
• Your car is new or fairly new and has a high retail value.
• You don’t have the funds to fix or replace your vehicle after a serious accident or theft.

In certain situations, some people may consider reducing their coverage to save money. For instance, if your vehicle is old, you don’t drive often, or you have the funds to replace your vehicle if you’re involved in a total-loss claim, you might be able to save some money by opting out of full coverage.

Here’s a quick equation to help assess your needs:

1. Determine your vehicle’s fair-market value.
2. Calculate how much you spend on coverage, which includes your premium for a policy period (typically 6 months) and deductible.
3. Subtracted your deductible from the worth of your car.
4. Subtract your 6 month premium amount from step 3.

If you got a large positive number, it’s definitely worth keeping additional coverage. If you got a small positive number, you still might benefit from full coverage, but potential claim payouts will likely be small. If you got a negative number, it may be worth considering a drop in coverage.

Conclusion

Once you own your vehicle, you’re granted the flexibility to change your insurance to fit your needs and budget, but you still have to carry some kind of insurance, depending on your state of residence. Always know your state’s minimum requirements before making any changes to your coverage.

Safe drivers with a clean driving record, prepaying an entire policy period, or bundling insurances together (car, renters, motorcycle, home, and others) are also great ways to save money on your plan.