Auto Insurance: The Owner's Advantage

Owning your vehicle outright doesn't automatically make your auto insurance cheaper, but it does give you more flexibility to reduce your coverage and therefore your premiums. When you have a loan on your car, you are usually required to have full car insurance coverage to protect the financier. This typically includes collision, comprehensive, and liability insurance. Once you've paid off your car loan, you can change your coverage and remove the comprehensive and collision coverage, as well as gap insurance. By removing some or all of this coverage, you can save significantly on your car insurance premiums. However, it's important to note that you would then need to pay for any repair costs for your vehicle out of pocket if it was damaged in an accident or another covered event.

Comprehensive and collision coverage

When you own your vehicle outright, you may be able to reduce your insurance costs by adjusting your coverage. While insurance premiums don't automatically decrease when you pay off your car, you can explore other coverage options as you're no longer bound by the requirements of your lender.

Comprehensive Coverage

Comprehensive coverage helps cover the cost of damages to your vehicle when you're involved in an accident that's not caused by a collision. This includes losses like theft, vandalism, hail, and hitting an animal. For example, if you hit a deer while driving, the damage would be covered under comprehensive coverage. However, if you swerve to miss the deer and hit a tree, this would be considered a collision with an object and wouldn't be covered by comprehensive coverage.

Comprehensive coverage is typically optional and can be useful if you don't have savings for auto repairs or if your car is high-value. It may be worth dropping this coverage if your vehicle is worth less than 10% of your annual insurance premium.

Collision Coverage

Collision coverage, on the other hand, covers damage to your vehicle in the event of a collision with another vehicle or a stationary object. For example, if you swerve to miss a dog and hit a fence, or if another vehicle hits your car, collision coverage would apply.

Like comprehensive coverage, collision coverage is also typically optional once you own your vehicle. However, it may be worth keeping if you don't have enough cash to repair or replace your car in the event of an accident. If your car is older or has high mileage, it may not be worth the cost. As a guideline, consider reducing collision coverage if your annual insurance premium is over 10% of the car's value.

Liability insurance

When you pay off your car loan, your insurance premiums don't automatically decrease. However, you can make changes to your insurance coverage to save money. For instance, you can remove the lienholder and reduce or eliminate comprehensive and collision coverage, as it is no longer required by your lender. This can result in significant savings on your premiums.

Now, let's delve into liability insurance and how it fits into the picture. Liability insurance is a crucial aspect of auto insurance and is required by most states to legally drive your vehicle. It covers property damage and bodily injuries caused to another person or their property in an accident where you are at fault. This type of coverage is typically divided into two categories: property damage and bodily injury.

Property damage liability insurance covers the cost of repairs to the other driver's vehicle, provides a rental vehicle while their car is being repaired, and pays for damage to buildings, fences, or other structures, as well as personal property inside the vehicle. It also covers legal fees if you are sued for property damage.

Bodily injury liability insurance, on the other hand, covers the medical expenses and rehabilitation costs of individuals injured in an accident caused by you. It also includes legal fees if you are sued for the injuries you caused. The coverage limits for bodily injury liability vary by state and depend on factors such as the severity of the accident and the number of people injured.

It's important to note that liability insurance does not cover damages to your own property or injuries to yourself or your passengers. To protect yourself and your passengers, you may consider additional coverages such as personal injury protection or uninsured/underinsured motorist coverage.

The cost of liability insurance depends on various factors, including the amount of coverage you select. Higher coverage limits will generally result in higher premiums. It's essential to review the requirements in your state and choose the coverage that best suits your needs.

Gap insurance

While car insurance premiums don't automatically decrease when you pay off your car loan, you can explore other coverage options and potentially save money. This is because you no longer need to carry the insurance required by your lender, and can instead opt for more affordable coverage options.

Now, let's delve into the topic of "Gap Insurance":

Let's say you purchased a new car for $30,000. Over a few years, its value depreciates to $20,000, but you still owe $25,000 on your loan. If your car is then involved in an accident and is deemed a total loss, your comprehensive or collision insurance will pay the vehicle's current value, minus your deductible. With gap insurance, the remaining $5,000 gap is covered, ensuring you don't have to pay off the remaining loan amount for a car you can no longer use.

When to Consider Gap Insurance:

• Leasing a Vehicle: Gap insurance is often required for leased vehicles, and it can protect you from owing more than the car's value.
• Lower Down Payment: If your down payment is less than 20% of the sale price, you may want gap insurance to avoid negative equity.
• Longer Financing Term: Longer financing terms increase the likelihood of owing more on the vehicle than it's worth, making gap insurance a wise consideration.
• Protection Against Depreciation: Some cars depreciate faster than others. Calculating the average depreciation rate can help determine if gap insurance is necessary.
• Loan Rollover: If you owe more on your loan than your car's worth at renewal, gap insurance can protect against negative equity.

Cost of Gap Insurance:

The cost of gap insurance varies, but it is generally affordable. Auto insurers typically charge a few dollars a month or around $20 per year. Lenders, on the other hand, may charge a flat fee of $500 to $700 for gap insurance, but you'll also pay interest on this amount if added to your loan.

Alternatives to Gap Insurance:

• New-Car Replacement Insurance: This option is ideal if you're more concerned about buying a new vehicle than paying off the old one. It's more expensive but helps cover the cost of a new car of the same make and model.
• Better-Car Replacement Coverage: This coverage provides funds for a newer model with less mileage if your vehicle is declared a total loss.

In summary, gap insurance is a valuable option to consider if you're leasing or financing a vehicle, especially if you're concerned about owing more than the car's value. It provides financial protection and peace of mind in the event of a total loss or vehicle theft.

Deductibles

When you take out an auto insurance policy, you will have to choose a deductible amount. A deductible is the amount you pay out of pocket towards an insurance claim before your insurance covers the rest. For example, if you have a $250 deductible and your car has $1,000 in damage, you will pay $250 for the repairs and the insurance company will pay $750.

There are two types of deductible: low and high. A low deductible means a higher insurance rate, while a high deductible means a lower insurance rate. For example, a $500 deductible is considered low and a $1,000 deductible is considered high. The most common deductible chosen by drivers is $500, but there is no wrong choice. Ultimately, it comes down to what you prefer: a lower deductible means a higher car insurance rate and lower out-of-pocket costs, while a higher deductible means a lower car insurance rate and higher out-of-pocket costs.

When you have a car loan, you are typically required to have a lower deductible to ensure you can cover any necessary repairs in the event of an accident. However, once you pay off your loan, you can choose your deductible. By choosing a higher deductible, you will be able to lower your monthly payments. This can be a double-edged sword, though, as it means you'll need to pay more out of pocket should an accident occur.

Some insurers offer a disappearing deductible program, where your deductible amount decreases or is waived if you go a set amount of time without a claim.

State requirements

In addition to liability insurance, some states require extra medical coverage or personal injury protection (PIP), which covers health care bills for the driver and their passengers. Some states also require uninsured and/or underinsured motorist insurance, although in other states, this type of coverage is optional.

Collision and comprehensive coverage are always optional, regardless of the state. However, they are still important and offer valuable protection for your vehicle, which isn't covered by liability insurance. Comprehensive coverage covers damage that happens to your car when you're not driving, such as damage from falling objects or weather damage. It also pays to replace your car if it's stolen. Collision coverage, on the other hand, covers damage from collisions regardless of who is at fault.

It's important to note that if you move to a new state, you may need to update your insurance coverage to meet the requirements of your new state of residence.

Frequently asked questions