When you finance an auto purchase, you must have full car insurance coverage. But what does that mean exactly? Are there other types of insurance you need to consider?
Navigating the world of car insurance can be daunting for many people. It’s essential to understand the different types of coverage and decide which ones are best for you and your vehicle. It’s crucial for cars financed or leased through a lender, as full coverage is often mandatory.
Buying a car with a loan presents an extra set of challenges because the lienholder holds the title and has specific financial interests in the collateralized asset. To protect their investment, lenders will want their customers to carry full coverage auto insurance at all times until the loan is paid off. Knowing what kind of insurance is needed and how much coverage you must have is vital to avoid having a lien against your title due to unpaid premiums or insufficient coverage. This article explores what it means to have full coverage and the additional protection needed to comply with your lender’s contractual obligations.
Table of Contents
What Are the Insurance Requirements for a Financed Car?
When financing a vehicle, lenders usually require full coverage insurance. This means the required insurance for financed cars includes collision coverage, comprehensive coverage, uninsured/underinsured motorist coverage, and liability.
States may also require you to hold medical payments (MedPay) and/or personal injury protection. You may also want to consider GAP insurance, which we’ll discuss below.
With minimum full coverage for financed cars, if your car gets damaged or totaled while it still has a lien, the lender can confidently expect the money from the insurer regardless of who is at fault. Ultimately, full coverage ensures that your lender will have its losses covered.
Do Requirements Change if You Lease a Vehicle or the Car Is Used?
Whether the car you’re financing is new or used, lenders typically require you to have full coverage insurance. Even if the car is used, your lender will still want to ensure its full value is insured to protect against losses or damages.
If you’re leasing a vehicle instead of buying, the lease company may include insurance within your monthly payments, though not all do. When you lease a car, insurance requirements are similar to those for financing — lenders usually expect you to have full coverage. However, specific requirements differ between lenders, so be sure to review the lease agreement for details.
How Does Your Lender Know You Have the Right Insurance?
When you take out car insurance, you list the lender as the “loss payee,” meaning that the insurance company tells the lender when you renew coverage, cancel it, or allow it to expire. The insurer communicates directly with the lender, so they stay updated on your policy status. It also means that when you file a claim, the insurer first addresses any checks to the lender.
If you do not maintain full coverage insurance for your financed vehicle, the lender can apply something called force-placed insurance to your loan, which is more costly and only covers the lender, not you.
When Can You Drop Full Coverage?
Once you’ve paid off your loan, you no longer need to meet your financed car insurance requirements. You still need the state-required minimum liability insurance, but you can drop full coverage. Be sure to consider the implications before reducing your coverage, though.
If your car gets damaged without full coverage, you’ll need to pay for any damages out of pocket. If yours is totaled, you may even be on the hook for purchasing a new car. Before you cancel full coverage, be sure you can afford to cover these costs.
Full Coverage vs. Standard Car Insurance
Basic liability insurance for your vehicle is a requirement in every state except New Hampshire. Some states expect you to hold MedPay (Maine and New Hampshire) or personal injury protection (Delaware, Florida, Hawaii, Kansas, Massachusetts, Michigan, Minnesota, New Jersey, New York, North Dakota, Oregon, and Utah).
However, the lender will impose different insurance requirements when you sign an agreement to finance a car. At a minimum, this usually includes collision coverage, uninsured/underinsured motorist, and comprehensive coverage, in addition to your state’s minimum requirements.
Liability
If you cause an accident, liability insurance covers bodily injury and property damage to the other party or parties. This does not cover any damage to your ownvehicle, so if you hit another vehicle, your insurance would only cover medical costs and repairs to the other party’s vehicle. Almost every state legally requires you to have liability insurance.
MedPay and Personal Injury Protection
Personal injury protection (PIP) and MedPay cover your medical costs if you’re in an accident, regardless of who’s at fault. PIP can also cover indirect expenses such as lost wages. These coverages may be necessary, depending on your health insurance coverage. Generally, lenders don’t require these as part of a financing agreement, but it’s worth checking your state’s requirements to be sure you don’t need this coverage.
Collision
Collision insurance covers repairs to your vehicle if you’re in an accident, regardless of who’s at fault. This differs from liability insurance, which does not.
When financing a vehicle, lenders typically require you to have collision insurance because they expect payment regardless of what happens or who is at fault. Without collision coverage, you would be responsible for covering the cost of repairs and continuing to make payments on the car.
Comprehensive
Comprehensive insurance covers circumstances other than collisions, such as theft, extreme weather events, and natural disasters. If hailstones or a falling tree branch damage your car or your vehicle is vandalized, comprehensive insurance covers these costs. It’s not mandatory in any state, but lenders often require it to ensure they’re protected. Keep in mind that collisions with animals are not covered by comprehensive auto insurance.
Uninsured and Underinsured Motorist Coverage
Uninsuredmotorist insurance provides coverage if you’re subject to a hit-and-run or hit by a driver who doesn’t have liability coverage. Your insurance company will pay for damages that the other driver’s insurance would have covered.
Underinsured motorist insurance covers the difference when your losses exceed the other driver’s coverage limits when they were at fault. If the cost of repairing your vehicle is higher than the guilty party’s maximum coverage limit, underinsured motorist insurance will pay for the difference.
State-Based Requirements
States have different minimum-coverage requirements, so it’s essential to check the laws in your state before purchasing or financing a vehicle. Each state specifies minimum coverage levels for different circumstances. These usually include a coverage level for bodily injury or death per person, death or bodily injury to all persons, and property damage per accident. The table below shows each state’s requirements:
State | Minimums |
|---|---|
$25,000 bodily injury liability limit per person $50,000 maximum for all bodily injuries per accident $25,000 maximum for property damage per accident | |
$50,000/$100,000 for bodily injury or death $25,000 for property damage | |
$25,000 bodily injury liability for 1 person $50,000 for 2 or more persons $15,000 property damage liability | |
$25,000 for bodily injury or death of 1 person in any 1 accident $50,000 for bodily injury or death of 2 or more persons in any 1 accident $25,000 for damage to or destruction of the property of others | |
$15,000 for injury/death to 1 person $30,000 for injury/death to more than 1 person $5,000 for damage to property | |
$25,000 for bodily injury or death to any 1 person in an accident $50,000 for bodily injury or death to all persons in any 1 accident $15,000 for property damage in any 1 accident | |
$25,000 per person $50,000 per accident for bodily injury liability $25,000 per accident for property damage liability | |
$25,000 for bodily injury or death of 1 person $50,000 for bodily injury or death of 2 or more persons $10,000 for injury to or destruction of property of others | |
$10,000 minimum limits of bodily injury liability per person $20,000 per crash $10,000 property damage liability per crash | |
$25,000 per person Bodily Injury Liability $50,000 per incident $25,000 per incident Property Damage Liability | |
$20,000 per person $40,000 per accident bodily injury liability $10,000 per occurrence property damage liability | |
$25,000 per person Bodily Injury Coverage $50,000 per accident Bodily Injury Coverage $15,000 in Property Damage Liability coverage | |
$25,000 for injury or death of 1 person in an accident $50,000 for injury or death of more than 1 person in an accident $20,000 for damage to property of another person | |
$25,000 for bodily injury to or the death of 1 individual $50,000 for bodily injury to or the death of 2 or more individuals in any 1 accident $25,000 for damage to or the destruction of property in 1 accident | |
$20,000 of bodily injury to or death of 1 person in any 1 accident $40,000 because of bodily injury to or death of 2 or more persons in any 1 accident $15,000 because of injury to or destruction of property of others in any 1 accident | |
$25,000/person for bodily injury $50,000/accident for bodily injury $25,000/accident for property damage | |
$25,000 for all claims for bodily injury damages sustained by any 1 person $50,000 for all bodily injury damages sustained by all persons as a result of an accident $25,000 for all property damage as a result of any 1 accident | |
$15,000 for bodily injury to 1 person $30,000 for bodily injury to more than 1 person in a single accident $25,000 coverage for damage to some1 else’s vehicle or other property | |
$50,000 liability for the injury to or death of any 1 person $100,000 liability for 1 accident resulting in injury to or death of more than 1 person $25,000 liability for property damage | |
$30,000 for bodily injury $60,000 for 2 or more people $15,000 property damage | |
$20,000 per person – Bodily Injury to Others $40,000 per accident – Bodily Injury to Others $5,000 per accident – Damage to Some1 Else’s Property | |
$50,000 for a person who is hurt or killed in an accident $100,000 for each accident if several people are hurt or killed $10,000 for property damage in another state | |
$30,000 for injuries to 1 person $60,000 for injuries to 2 or more people $10,000 for physical damage to the other driver’s vehicle or for damage to property | |
$25,000 per person (limited to a single accident) $50,000 per accident for bodily injury $25,000 per accident for property damage | |
$25,000 per person for bodily injury $50,000 per accident for bodily injury $25,000 per accident for property | |
$25,000 because of bodily injury to or death of 1 person in any 1 accident and subject to the limit for 1 person $50,000 because of bodily injury to or death of 2 or more persons in any 1 accident $20,000 because of injury to or destruction of property of others in any 1 accident | |
$25,000 because of bodily injury to or death of 1 person in any 1 accident $50,000 because of bodily injury to or death of 2 or more persons in any 1 accident $25,000 because of injury to or destruction of property of others in any 1 accident | |
$25,000 for bodily injury or death of 1 person in any 1 accident $50,000 for bodily injury or death of 2 or more persons in any 1 accident $20,000 for injury to or destruction of property of others in any 1 accident | |
$25,000 per person for bodily injury $50,000 if 2 or more persons are hurt $25,000 for property damage | |
$15,000 per person – bodily injury liability $30,000 per accident – bodily injury liability $5,000 per accident – property damage liability | |
$25,000 for bodily injury to or death of 1 person $50,000 for bodily injury to or death of 2 or more persons $10,000 for property damage in any 1 accident | |
$25,000 for bodily injury and $50,000 for death for a person involved in an accident $50,000 for bodily injury and $100,000 for death for 2 or more people in an accident $10,000 for property damage for a single accident | |
$30,000 Bodily injury (1 person) $60,000 Bodily injury (2 or more people) $25,000 Property damage | |
$25,000 per person (the maximum amount payable to 1 person) $50,000 per accident (the maximum amount payable to all people injured in 1 accident) $25,000 per accident – property damage liability | |
$25,000 for injury/death of 1 person $50,000 for injury/death of 2 or more people $25,000 for property damage in an accident | |
$25,000 of bodily injury protection per person $50,000 per accident $25,000 of property damage protection | |
$25,000 per person $50,000 per crash for bodily injury to others $20,000 per crash for damage to others’ property | |
$15,000 for injury or death of 1 person in an accident $30,000 for injury or death of more than 1 person in an accident $5,000 for damage to property of another person | |
$25,000 bodily injury liability per person $50,000 bodily injury liability per accident $25,000 property damage liability per accident | |
$25,000 per person for bodily injury $50,000 for all persons injured in 1 accident $25,000 for all property damage in 1 accident | |
$25,000 bodily injury liability insurance per person $50,000 total bodily injury liability per accident $25,000 property damage liability per accident | |
$25,000 for each injury or death per accident $50,000 for total injuries or deaths per accident $15,000 for property damage per accident | |
$30,000 of coverage for injuries per person $60,000 per accident $25,000 of coverage for property damage | |
$25,000 because of liability for bodily injury to or death of 1 person $65,000 because of liability for bodily injury to or death of 2 or more persons arising out of the use of a motor vehicle in any 1 accident $15,000 because of liability for injury to, or destruction of, property of others arising out of the use of a motor vehicle in any 1 accident | |
$25,000 for 1 person $50,000 for 2 or more persons killed or injured $10,000 for damages to property in any 1 crash | |
$30,000 Injury or death of 1 person $60,000 Injury or death of 2 or more people $20,000 Property damage | |
$25,000 for injuries or death to another person $50,000 for injuries or death to all other people $10,000 for damage to another person’s property | |
$25,000 per person $50,000 per accident $10,000 Property Damage Liability | |
$25,000 for 1 crash, 1 injury $50,000 for 1 crash, 2 or more injuries $25,000 for property damage | |
$25,000 for the injury or death of 1 person $50,000 for the injury or death of more than 1 person $10,000 for property damage | |
$25,000 bodily injury 1 person $50,000 bodily injury per accident $20,000 property damage liability |
How Much Does Full Coverage Insurance Cost?
The cost of full coverage insurance varies based on several factors. Younger drivers are considered more of a risk, for instance. Gender also impacts premiums, along with your location and vehicle type. Annual premiums for full coverage insurance can range from $1,000 to $2,500, with monthly payments averaging around $100 to $200. Remember, this insurance cost is on top of your monthly payment for the car, so remember to factor in those expenses when determining your overall auto budget.
How to Save Money on Full Coverage Car Insurance
Full coverage insurance can add a significant expense on top of your monthly lease payment. However, there are a few ways you can lower your premiums.
Commit to Safer Driving Habits
Safer drivers are generally eligible for lower premiums, so committing to safer driving habits is one of the best ways to reduce your insurance costs long term. Having a clean record to show the insurance company can help, but you can also clean up your driving record by taking classes.
Adjust Your Deductibles to Be Higher
When taking out an insurance policy, you must select your deductible. This is an initial amount that you pay to cover some of the costs if you file a claim. If you have an accident, you will pay for the deductible, and the insurance company covers the rest. Selecting a higher deductible will lower your monthly premium because you’re asking the insurance company to assume less risk.
To decide how high you can adjust your deductible, consider how much cash you typically have available. If you have a savings fund with a few thousand dollars, you might feel comfortable covering repairs of up to $1,000. If not, it would be sensible to stick to a lower deductible that you can manage. Keep in mind, too, that your insurance won’t cover any damages that don’t exceed the cost of your deductible.
Look for Relevant Discounts
Many insurance companies offer various discounts that can help you save on premiums. See if any of these are available when you’re comparing coverage options:
- Student discounts: If you get good grades, live within a specific distance from home, or complete driver’s education classes, you may qualify for a student discount on your insurance policy.
- Safer driver discounts: You can also find discounts for safe driving. Generally, this means having a clean driving record of 3 to 5 years, no accidents that were your fault, a lack of significant claims, and zero points on your license from violations.
- Policy bundling: If you need home or life insurance, you might consider policy bundling. Taking out multiple policies with the same provider can get you discounts on all your coverage.
Compare Quotes and Insurers
The cost of insuring your vehicle can vary across insurers, so it’s important to compare a few quotes before you buy coverage. Compare options with higher and lower deductibles and coverage limits, but be careful not to agree to deductibles or limits that will leave you responsible for costs you can’t afford after an accident.
It’s also important to look at an insurance company’s track record and financial stability when comparing coverage. Choosing the cheapest possible coverage may not be wise if the insurance company ultimately won’t be able to pay out when you file a claim. Check sites such as A.M. Best and Standard & Poors for reviews and financial strength assessments for any insurance companies you’re comparing.
Why Consider GAP Insurance?
Insurance companies typically only cover the current market value of a vehicle. If that turns out to be less than what you owe, you’re responsible for covering the difference on your loan. GAP insurance covers the discrepancy between the current market value and any amount you still owe on a loan.
For instance, you purchase a new car for $20,000 with a 5-year, $19,000 loan. A new car can lose 10% of its value the moment you drive it off the lot, so you already owe more for the car than it is worth. The same is even more apparent if you total your car. GAP insurance would pay the remaining balance on your loan so that you’re not responsible for any shortfall.
If you don’t purchase GAP insurance, consider the financial implications of a totaled vehicle. You’d have to purchase a new car and pay off your existing loan balance. GAP insurance may be a wise investment if that’s more than you can manage financially.