Paid-Off Cars: Cheaper Insurance?

Paying off a car loan doesn't automatically reduce insurance rates, but it does give car owners more control over the type and amount of coverage they have, which can help save money on insurance. When a car is being paid off through a loan, lenders typically require full coverage, including collision, comprehensive, and liability insurance, to protect their interest in the car. This can be expensive. Once the loan is paid off, however, the owner is no longer required to carry this level of coverage and can choose to reduce it, which will lower insurance premiums.

You can choose to remove comprehensive and collision coverage

When you pay off your car loan, you can choose to remove comprehensive and collision coverage from your auto policy. Banks and financing companies are called lienholders and they generally require you to have comprehensive and collision coverage while you pay off your loan. Once the loan is paid off, you are no longer required to carry these coverages.

Comprehensive coverage and collision coverage are two common types of auto insurance that offer you protection when your vehicle is damaged. However, the type of damage they cover is very different. Collision coverage protects your vehicle if it is damaged from colliding with an object (such as a garage door or another vehicle), the ground, or another vehicle. On the other hand, comprehensive coverage covers your vehicle if it is damaged from something other than a collision, like an animal or vandalism, or if it is stolen.

When deciding whether to remove comprehensive and collision coverage, you should consider your car's value and the state of your personal finances. If your vehicle is older and has lost much of its value, it may be more cost-effective to reduce your coverage. Additionally, if you have built up a substantial savings account and feel confident that you can repair or replace your vehicle in the event of damage, dropping this coverage can reduce your premium. However, it is important to note that you will need to pay for repair costs out of pocket if your vehicle is damaged.

Before removing comprehensive and collision coverage, it is recommended to talk to an insurance representative about ways to lower your coverage limits to a level that still provides peace of mind. It is also important to remember that you are still required by law in all states but New Hampshire to carry liability coverage.

You can save money by removing gap insurance

Once you've paid off your car loan, you can make changes to your insurance coverage. You can remove your additional interest/loss payee and no longer need to worry about paying any car payments. You can also remove comprehensive and collision coverage from your auto policy if your vehicle is paid in full.

Gap insurance is an optional auto insurance coverage that applies if your car is stolen or deemed a total loss. It covers the difference between what a vehicle is currently worth (which your standard insurance will pay) and the amount you actually owe on it. For example, if you owe $25,000 on your loan and your car is only worth $20,000, your gap coverage will cover the $5,000 gap, minus your deductible.

Gap insurance is a good idea if you've made less than a 20% down payment, financed for 60 months or longer, leased the vehicle, purchased a vehicle that depreciates faster than average, or rolled over negative equity from an old car loan into the new loan. However, it is not required by any insurer or state, and you can decline it if a dealership automatically adds it to your loan.

By removing gap insurance, you can save money on your car insurance premiums. However, keep in mind that you would need to pay for repair costs or cover the difference between the payout and the loan amount if your car is stolen or totaled.

You can increase your deductible to lower your premium

When it comes to car insurance, a deductible is the amount of money you need to pay out of pocket for repairs to your covered vehicle after an accident. The higher the deductible, the lower the premium—and vice versa. This is because when you choose a higher deductible, you assume more financial responsibility in the event of a claim, whereas a lower deductible means your insurer assumes more financial responsibility.

If you opt for a lower deductible, you'll be paying a higher premium. Over time, you may end up having paid more money in total premiums than someone with a higher deductible who has never filed any claims. Turning in small claims that are just over a small deductible could also drive premium costs higher.

On the other hand, if you choose a higher deductible and end up filing several insurance claims over a few years, you'll have to pay the deductible amount each time to cover your portion of the repair costs.

If you have the financial buffer to cover the out-of-pocket costs of a claim but are looking for ways to trim monthly or annual costs, raising your auto insurance deductible may deliver significant savings. For example, increasing a deductible from $200 to $500 could reduce collision and comprehensive coverage costs by 15% to 30%. Moving up to a $1,000 collision or comprehensive deductible might save you 40% or more.

However, there are some trade-offs to consider when raising your deductible. For instance, you'll have greater financial responsibility for claims, meaning you'll pay more out of pocket for repairs. In some cases, the amount of damage could be less than your deductible, and you'd need to cover the repair costs yourself.

Additionally, the savings you'll get from raising your deductible may be limited depending on your situation. More expensive vehicles may result in higher premiums that wouldn't be significantly reduced by changing your deductible. Other factors, such as your driving record, miles driven, location, and claims frequency, will also impact your insurance premium over time.

You can remove the lienholder from your insurance policy

Paying off your car loan is a big step. It means you can remove your additional interest/loss payee from your insurance information and you no longer have to worry about paying any car payments. It also means you can remove the lienholder from your insurance policy. A lienholder is a loan lender that has a legal claim to your financed car.

To remove the lienholder, you will need to contact your insurance company. You will also need to provide proof of the loan payoff, which can be done using the title or lien release document that the lender will send you. Once the lienholder has been removed, you can explore other coverage options. You won't need as much coverage as you did when you were locked into a loan or lease, but you'll still need some form of coverage as this is required by law in all states except New Hampshire.

After removing the lienholder, you have the option to remove comprehensive and collision coverage from your auto policy if your vehicle is paid in full. Comprehensive coverage covers your vehicle if it's damaged from something other than a collision, like an animal or vandalism, or if it's stolen. Collision coverage protects your vehicle if it's damaged from colliding with an object, the ground, or another vehicle.

You can also consider switching to high-limit liability coverage to save some money. Or, if you prefer, you can continue to hold full coverage, especially if you're not worried about a higher monthly premium. Either way, it's a good idea to shop around to make sure you get the best deal on your coverage.

You can review your coverage to ensure it still meets your needs

It is important to review your insurance coverage at least once a year to ensure it still meets your needs. There are several life events that can impact your insurance needs, and you should contact your insurance agent or company representative when these occur. These include:

• Getting married or divorced
• Having a baby
• A teenager in the household getting a driver's license
• Switching jobs or experiencing a significant change in income
• Extensive home renovations
• Buying a second home
• Acquiring new valuables, such as jewellery, electronics, fine art, or antiques
• Signing a lease on a new home or apartment
• Joining a carpool
• Retiring

In addition to these life events, there are other times when you should review your insurance coverage. When your policy comes up for renewal, take the time to review it and ask your agent any questions or address any concerns. You should also review your coverage when you've made major purchases or improvements to your home, when you've made your home safer (e.g., by installing a state-of-the-art fire/burglar alarm system), or when you experience major lifestyle changes, such as adult children moving back home.

By regularly reviewing your insurance coverage, you can ensure that it continues to meet your needs and provide adequate protection for your assets and liabilities.

Frequently asked questions