If a vehicle owner takes out a loan to pay for his or her purchase, the lender will likely require that full coverage (collision and comprehensive insurance) be kept in place until it has been paid off in full. All drivers must have liability insurance in place to comply with state laws, whether the vehicle has an outstanding loan or not.
Liability Auto Insurance
Liability coverage protects the vehicle owner from being personally responsible for paying for damages he or she is responsible for causing in a motor vehicle accident. Bodily injury liability coverage pays for medical bills and economic losses incurred the other driver and his or her passengers.
Property damage liability coverage pays for the cost of repairing the other driver’s vehicle. This protection also pays for repairs to public property damaged or destroyed in the accident, such as mail boxes, sign posts, guard rails and fences.
Collision and Comprehensive Auto Insurance
Collision insurance pays for physical damage caused to the vehicle due to hitting an inanimate object or being struck by another vehicle. It also pays out when the damage to the car was caused by a rollover accident.
Comprehensive insurance also covers physical damage to the car. It pays for repairs to the vehicle caused by an event other than a collision, including:
- Falling objects
- Hitting an animal
The vehicle owner is responsible for paying a deductible when making a claim under the collision or comprehensive provisions of his or her policy. This is the amount the policyholder agrees to pay out of pocket before the auto insurance company will pay out anything to settle the claim. Customers who choose a higher policy deductible can qualify for lower rates on their auto insurance policy.
Once the car has been paid off, the owner can consider whether keeping full coverage in place makes sense. This type of insurance pays out based on the vehicle’s cash value, as opposed to what it would cost to buy a new car or what the owner paid for it in the first place.
The cost of keeping full coverage on a vehicle accounts for a significant amount of what the driver is paying for his or her auto insurance. The cash value of the car depreciates over time and at a certain point, it no longer makes sense to continue paying premiums for this type of coverage, since the benefit it offers decreases over time.
To save money on the cost of auto insurance coverage for a car which has been paid off in full, a policyholder may want to consider dropping the collision coverage completely. The comprehensive portion of the policy can be limited to fire and theft only. This will provide some protection to the owner while keeping costs down. The money saved on auto insurance premiums could be placed into a separate account to pay for the policyholder’s next vehicle if a total loss occurred.