When should I drop my full coverage car insurance?

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Things to Remember...
  • Full coverage is defined as a policy that includes both comprehensive and collision coverage on a covered vehicle
  • If you’re currently financing a vehicle or the car is under lease, you’re required to carry full coverage on the vehicle until the vehicle is paid off
  • Failing to carry full coverage on a financed vehicle could lead to forced-placed insurance coverage that raises the principal on a loan
  • If your vehicle is paid off, you aren’t obligated to carry full coverage but it might still be in your financial interest
  • It’s important that you review the Actual Cash Value of your vehicle to see if it’s worth it to carry comprehensive and collision
  • There’s a common rule of thumb that says that if your annual cost for full coverage is more than 10% of the actual cash value of the car, the coverage should be dropped.

You’re required by state law to carry auto insurance, but there’s no vehicle code that says that you must buy insurance that protects your vehicle.

Instead, state auto insurance requirements indicate that vehicle owners must carry third-party liability in the case of an accident.

Since the state is only concerned with liability coverage, you’re left to decide whether or not you want to pay for full coverage.

In some instances, you’ll be required to carry full coverage because of contractual obligations and in other instances, you’ll want the coverage simply because you want the financial protection.

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What does liability coverage pay for?

It’s important to understand how coverage options on your policy work before you assume that a basic policy will provide you with adequate protection.

As mandated by state law, drivers are required to buy two forms of coverage: Bodily Injury Liability and Property Damage Liability.

While the coverage options do protect your assets, they won’t be paid directly to you.

Instead, each coverage has limits that’ll be paid out directly to a third-party if they need property repairs or medical bills after getting into an accident that you cause.

Liability will never pay to repair your own vehicle or pay for your own medical bills.

What’s the definition of a full coverage auto insurance policy?

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In actuality, there’s really no such thing as “full coverage” insurance. While the term is thrown around often, “full coverage” isn’t a coverage and it doesn’t mean that you’re protected for every type of loss that you can experience.

Instead, the term means that you’re carrying both liability insurance and physical damage insurance. Physical damage coverage consists of comprehensive and collision coverage.

Comprehensive coverage pays for losses to your vehicle when they are caused by specific perils. Some of these perils include:

  • Fire
  • Theft
  • Vandalism
  • Glass damage
  • Damage caused when you contact a live animal.

Collision will pay for the repairs needed to restore your car when it’s in an accident with a car or another type of object. You can only carry collision coverage if you also have comprehensive but comprehensive can be carried on its own.

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When You’re Required to Have Full Coverage

Your state may not be worried about your ability to repair your own vehicle following a loss, but there are other entities that care. If you do not hold title to your vehicle, that’s a good sign that you’ll be required to carry full coverage.

Any vehicle that’s being financed through a lender or leased through a dealer will need full coverage. The insurance requirement is written into all finance and lease contracts to protect the company from a loss of the collateral on the contract.

If you decide that you want to keep the physical damage coverage because of the high premiums, canceling the coverage while the loan is still in effect can lead to some expensive consequences.

You could have a loss without insurance and be on the line to pay for the repairs or you could have forced-placed insurance added to your loan. This insurance doesn’t protect you but it does cost you money while protecting the lender.

Once the car is paid off, you might be eager to remove comprehensive and collision.

However, it’s not always in your best interest to save a few hundred dollars to put yourself at risk without any protection. You’ll have to assess a few factors before you make a final decision.

Assess How the Insurance Company Will Value Your Vehicle

When it comes to deciding if you should keep full coverage, it’s all in the value of your car. How much you think your car is worth and how much it’s worth in the eyes of the provider are very different figures.

You want to know how this evaluation is performed before you ever have a loss to see if you’ll get enough money from a claim to justify the expense.

It’s easy to assume a car in good condition will retain its value, but insurance companies use several different sources to evaluate a car. Here are some of the methods a claims adjuster might use:

  • Trusted valuation guides
  • Sales records from private party sales in the area
  • Sales records from dealership sales of similar models with similar specs
  • Current active listings for equivalent vehicles that are on the local market

Comparing the Value of the Car to the Cost for Coverage

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Now that you’ve researched how much you might get from the insurance company if you were to total your vehicle, it’s time to compare this number with how much you’ll pay for full coverage over the period of a term.

If your vehicle doesn’t retain much value but the cost for full coverage is high, it might not make sense to buy full coverage.

There’s a common rule of thumb that says that if your annual cost for full coverage is more than 10% of the actual cash value of the car, the coverage should be dropped.

This rule only works if you’re willing to bear the burden of replacing your car on your own if something were to happen.

When you have a loss, having full coverage can truly help you restore your vehicle. Unfortunately, there’s no way to tell if you’re going to ever have a loss while you have full coverage. If you’d like to price the cost of basic auto insurance, it’s time to start soliciting quotes.

You can easily do this by using an online insurance comparison tool that connects you to multiple insurance quotes instantly. Start comparing car insurance rates now by entering your zip code in our FREE tool below!

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