Consumers who are looking for coverage for a new car may not be focused on what kind of auto insurance is best for a vehicle that is paid off. Auto insurance needs change as the policyholder’s circumstances change, and coverage which made sense when the car was bought my not make sense once the loan has been paid off.
Drivers should make a point of reviewing their auto insurance coverage at least once a year to confirm that they have the right type and level of protection in place. The best time to start looking at the existing policy is a couple of months before the current coverage is up for renewal. If a policyholder is interested in making a change to his or her insurance or switching companies, this time frame provides time to get quotes for coverage.
Auto Insurance Coverage for New Cars
When a driver buys a new car and takes out a loan to pay for it, the financing company will insist that full coverage (collision and comprehensive protection) be put in place. Collision coverage pays out when the car is damaged or totaled in an accident which involves striking an object. It also pays for damage caused in a rollover accident.
Comprehensive insurance covers the vehicle against other types of losses. This is the part of the policy which pays out when the damage to the vehicle is caused by something other than a collision. Losses covered under the comprehensive part of the policy include fire, theft, flooding, wind, hail and falling objects. It also pays out if the car is vandalized or the driver hits an animal.
If the car is totaled and full coverage is in place, the insurance company pays out based on its cash value. The money is paid to the financing company if there is an outstanding loan. Drivers can also purchase gap coverage to pay the difference between the amount owing on the loan and the vehicle’s cash value. The value of the vehicle will start depreciating as soon as it is driven off the dealer’s lot, and it’s very common for a driver to owe more on his or her car than what it’s worth.
Once the car has been paid off, the owner may not need to keep full coverage in place. Over time, the value of the car continues to depreciate and at a certain point, it doesn’t make sense to pay premiums and keep a deductible in place to pay for a car with little cash value.
If the cash value is close to or lower than the policy deductible, dropping the collision coverage and limiting the comprehensive protection to fire and theft only is worth considering. The physical damage portion of an auto insurance policy accounts for a good portion of the premium that the policyholder pays, and making these changes can result in significant savings for an older vehicle.