Jeffrey Wade
If you're financing a car, your financer will likely require you to have full-coverage auto insurance until your loan is paid off. This is to protect their investment in the vehicle, which acts as collateral for your loan. Full-coverage insurance typically includes comprehensive, collision, and liability insurance, and may also include uninsured motorist coverage or gap insurance. While this level of coverage is not legally required by states, it is mandated by financers to ensure their asset is protected in case of default.
| Characteristics | Values |
|---|---|
| Who determines the auto insurance coverage | The financer/lender |
| What is the minimum coverage | Full coverage policy that combines comprehensive, collision, and liability insurance |
| Who does full coverage protect | The financer/lender and the borrower |
| What happens if you don't buy insurance | The financer/lender may get force-placed insurance, which is more expensive |
| What happens if you don't have full coverage | The financer/lender can repossess the vehicle or force you to make a higher monthly payment |
| Can you cancel insurance on a financed car | No, unless you consult your lender |
| Can you select a high deductible for auto insurance | No, the financer/lender usually limits the deductible to $500 |
What You'll Learn
Full coverage insurance
While there is no standard policy called "full coverage auto insurance", it generally refers to a dependable auto insurance package that provides coverage for a variety of different circumstances. Full coverage insurance typically includes liability, comprehensive, and collision insurance. It usually has higher liability limits than the minimum required by your state. This protects you if you cause an expensive accident.
In addition to these standard components, full coverage insurance can also include underinsured and uninsured motorist coverage, which pays for damages after a crash with an uninsured driver, and personal injury protection (PIP) insurance, which covers your own medical costs after an at-fault accident. Some full-coverage insurance policies also include gap insurance, which can help pay off your car loan in the event of a total loss.
The cost of full coverage insurance varies depending on various factors, including the coverages you choose, your driving and insurance history, your annual travel distance, and your car’s make, model, and year. The average cost of full coverage car insurance is $164 per month, more than twice the average price of liability-only car insurance.
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Collision and comprehensive insurance
Comprehensive insurance, on the other hand, covers non-collision damage to your vehicle, such as fire, hail, or vandalism. It also covers damage caused by accidents that don't involve colliding with another vehicle or object, including vandalism, hail damage, and collisions with animals. If your car is damaged by a falling tree or stolen, comprehensive insurance will cover the cost of repairs.
While neither collision nor comprehensive insurance is required by state law, they are typically required for a car loan or lease. This is because your vehicle is the collateral for your loan. If it is stolen or totaled, you will still need to pay off the loan. Lenders, therefore, require you to have full-coverage insurance, which includes collision and comprehensive insurance, to protect their investment. Once your car loan is paid off, collision and comprehensive insurance become optional.
The cost of collision and comprehensive insurance varies depending on the insurer, your location, the value of your vehicle, and other factors. The deductible, or the amount deducted from the insurance payout when you file a claim, also affects the cost. Common deductibles are $250, $500, $1,000, and higher. The higher the deductible, the lower the premium, and vice versa.
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Lender requirements
Most lenders require collision and comprehensive insurance coverages to protect their investment. Collision coverage helps pay for the cost of repairing or replacing your car after an accident, regardless of fault. Comprehensive coverage, on the other hand, covers damage caused by accidents that don't involve colliding with another vehicle or object, such as vandalism, hail damage, and collisions with animals.
In addition to the above, lenders may also require other types of coverage, such as uninsured motorist coverage or gap insurance. Uninsured motorist coverage protects you in the event of an accident with a driver who doesn't have insurance. Gap insurance, or Guaranteed Auto Protection, pays off the remaining balance of your car loan if your vehicle is totalled before you finish paying it off. While not all lenders require this, it can be a valuable addition to your policy.
It's important to carefully review the lender requirements before purchasing auto insurance to ensure you comply with all the terms. Some lenders may also have specific requirements for deductible amounts, so it's essential to check and confirm that your chosen policy meets their standards.
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GAP insurance
When you buy a new car, it starts to depreciate in value as soon as it leaves the car lot. Most cars lose 20% of their value within a year. Standard auto insurance policies cover the depreciated value of a car, which is the current market value of the vehicle at the time of a claim. This means that if you finance a new car with a small deposit, the amount of the loan may exceed the market value of the vehicle itself in the early years of ownership.
This is where Guaranteed Asset Protection (GAP) insurance comes in. GAP insurance covers the difference between what a vehicle is currently worth (which your standard insurance will pay) and the amount you owe on it. For example, if you get a loan for a car worth $18,000 and it is considered a total loss after an accident, the actual cash value of the vehicle is $14,000. This is what your insurance company will pay, but you still owe $17,000 on your loan. GAP insurance can cover the remaining $3,000.
When buying a financed car, most lenders will require you to carry a full-coverage auto insurance policy. This is because your vehicle is the collateral for your loan. Liability insurance only covers property damage and medical expenses for other parties when you are at fault for an accident. If your car is stolen or totalled and you don't have full coverage, you will still need to pay off the loan for a vehicle you no longer have.
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State requirements
Each state in the US has its own minimum car insurance requirements. Only New Hampshire and Virginia do not require car insurance. However, even in these states, residents are still liable for any bodily injury or property damage they cause.
Most states require bodily injury liability (BI) and property damage liability coverage (PD). Some states also require uninsured/underinsured motorist coverage (UM/UIM), personal injury protection (PIP) or medical payments coverage (MedPay).
California
California helps low-income drivers who would otherwise not be able to afford car insurance to get a policy through the California Automobile Assigned Risk Plan. The minimum liability limits for one of these policies are 15/30/5.
Indiana
Indiana specifies that insurers include UM/UMI at $50,000 per accident unless it is expressly rejected in writing.
Maine
Maine requires motorists to carry $2,000 in coverage for any injuries they or their passengers incur.
Michigan
Michigan requires drivers to carry PIP coverage, though the exact amount depends on the type and amount of health insurance coverage they have. Michigan also requires property protection insurance (PPI), with a minimum limit of $1 million in property damage coverage.
New York
New York also requires motorists to carry wrongful death coverage, with minimum limits of $50,000 for one death per accident and $100,000 for multiple deaths per accident.
Utah
Utah drivers can choose a single bodily injury and property damage coverage option of $80,000.
Virginia
In Virginia, drivers can pay the state a fee of $500 a year instead of buying car insurance. However, this does not provide any coverage in the event of an accident.
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Frequently asked questions
Yes, if you have an auto loan, your lender will likely require you to carry a full-coverage auto insurance policy until your loan is paid off. This is because the vehicle is the collateral for your loan, and full coverage protects both you and the lender in case of an accident or damage to the car.
Full-coverage car insurance typically includes liability insurance, which covers damage and medical expenses for other parties if you cause an accident, as well as collision and comprehensive insurance. Collision insurance covers damage to your vehicle, regardless of fault, while comprehensive insurance covers non-collision damage, such as theft, vandalism, or natural disasters.
No, lenders generally require full coverage on financed cars. Liability-only insurance only covers damage and injuries to others and does not provide protection for your own vehicle.
If you don't obtain full coverage as required by your lender, they may require you to obtain it or face penalties. In some cases, the lender may purchase insurance on your behalf, known as force-placed insurance, which is typically much more expensive.
No, lenders usually set limits on how high your deductibles can be to ensure that the vehicle can be repaired or replaced if damaged. Common limits are $500 or lower, but approval for higher deductibles may be given for luxury cars or high-value loans.
