If you’ve recently paid off an auto loan, you may wonder if car insurance is cheaper if you own the car. This article discusses which coverage is optional and what is required. It also describes how to reduce insurance costs and facts to consider when assessing your auto coverage.
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Is Insurance Cheaper When You Own the Car?
Your insurance premiums won’t go down when you pay your car off. But you no longer have to carry insurance required by your lender, so you could reduce your coverage to lower your cost.
States require motorists to have liability insurance. This covers the other driver’s vehicle damage and injuries if you are in an accident that’s your fault.
Lenders require comprehensive collision insurance that covers damage to your car if you have an auto loan or lease your vehicle. Because the car is securing the loan, this coverage protects the lenders against a loss.
Once you pay off your loan or lease, you can drop or reduce the comprehensive and collision coverage. This lowers your premiums, but if your car is in an accident, you’ll have to pay for repairs yourself.
Lowering Your Limits
States set minimum requirements for the coverage needed to be legally insured. For example, several states require drivers to carry $25,000 per person or $50,000 per accident in bodily injury coverage and $25,000 per accident in property damage liability. The average cost of minimum coverage is $545 per year.
Lenders also require you to purchase collision and comprehensive insurance when you finance a car. Collision coverage repairs or replaces your vehicle if it collides with a car or a stationary object, like a tree. Comprehensive insurance covers damage from causes other than a collision with another car. Examples include hail damage or hitting an animal. A full-coverage auto insurance policy combines liability, collision, and comprehensive coverage.
The average cost of full coverage insurance in 2022 is $1,771 per year.
After paying off your car, having collision and comprehensive coverage is optional. You could eliminate this coverage or adjust your policy to reduce your premiums.
Changing Your Deductibles
A deductible is an amount you pay out-of-pocket toward an insurance claim. If your deductible is $250 and your car has $1,000 in damage, you spend $250 for repairs, and the insurance company pays $750. There is no deductible on liability claims even if your insurance pays for injuries or repairs for another driver.
If filing a collision or comprehensive claim, you will pay a deductible. Most drivers choose a $500 deductible. A higher deductible lowers your premium, though you’ll pay more towards a claim. Increasing your deductible from $500 to $1,000 could save 20% on your premium.
Give Up Gap Insurance
Gap insurance pays for the difference between the cash value of your car and the amount you owe on a loan. For example, imagine buying a car and financing it for $15,000. An accident destroys the vehicle a few months later. The car’s cash value is $13,000, so that is what the insurance pays. You’d still owe $2,000 on your car loan for a vehicle that no longer exists. Gap coverage pays the remaining $2,000. You don’t need gap insurance after paying off your car loan.
What Should I Do After I Pay Off My Car?
After you’ve paid off your car, have your insurance company remove your lender’s name from your policy. That way, if there is a claim, the insurer will know to send the check to you rather than the bank.
This is also an excellent time to reassess your insurance coverage. The following are things to consider regarding auto insurance after you pay off your car.
How Much Car Insurance Is Required in Your State? (75 words)
If you’re considering dropping some of your auto coverage, make sure you know your state’s minimum auto insurance requirements. Most states require you to have bodily injury liability insurance and property damage liability. There are two exceptions. New Hampshire doesn’t require auto insurance, but you must prove your ability to pay for incurred damages. Virginia allows residents to opt-out of insurance if they pay an uninsured motorist fee of $500 per year.
Do You Need Collision Coverage When You Pay Off Your Car?
If your car is in an accident, collision coverage pays to repair or replace it. Lenders often require this coverage, but it’s optional when you pay off your car.
Before dropping collision coverage, ask yourself if you have enough cash to repair your car. The average collision claim was $3,588 in 2020. Can you afford to pay for that? Are you prepared to replace your car if necessary?
It might not be worth paying for collision coverage for an older car or one with high mileage. One guideline is to reduce coverage if your annual insurance premium is over 10% of the car’s value.
Do You Need Comprehensive Coverage When You Pay Off Your Car?
Comprehensive coverage pays for damage from causes other than a crash. Examples include fire, windshield cracks, vandalism, theft-related damage, weather, falling objects such as a tree limb, or hitting an animal.
After you pay off the auto loan, comprehensive insurance is optional. It makes sense to keep your comprehensive coverage if you don’t have savings for auto repairs or if your car is high-value. It could be time to drop comprehensive coverage if your vehicle is worth less than 10% of your annual insurance premium.