Auto Loan Insurance: Minimum Coverage Requirements Explained

If you're buying a car with a loan from a bank or lender, you'll likely be required to take out full-coverage auto insurance. This is because the lender wants to protect their investment in your vehicle. Full coverage typically includes comprehensive, collision, and liability insurance, though the specific requirements may vary by lender and state. Without full coverage, the lender may repossess the vehicle or force you to take out a more expensive policy.

Liability insurance

Understanding Liability Insurance

Minimum Coverage Requirements

When taking out a loan to purchase a vehicle, banks and lenders typically require a minimum level of auto insurance, often in the form of a full-coverage policy. This full-coverage policy usually combines liability insurance with comprehensive and collision insurance. While requirements may vary by state and lender, carrying liability insurance is generally mandatory. It is worth noting that some lenders may also mandate higher liability coverage limits for added protection.

When purchasing liability insurance, you will encounter different coverage limits represented as a series of numbers, such as 50/100/50 or 100/300/100. These numbers indicate the maximum payout per person and per accident for medical bills and property damage resulting from an accident caused by the insured driver. For example, a policy with limits of 100/300/100 provides up to $100,000 per person and $300,000 per accident for bodily injury liability, along with $100,000 for property damage liability.

Importance of Liability Insurance for Loaned Vehicles

Lenders require liability insurance as it protects their investment in the financed vehicle. If an accident occurs and the driver is at fault, the liability coverage ensures that the affected individuals can receive compensation for their damages and injuries. This coverage also helps maintain the value of the financed vehicle, which serves as collateral for the loan. Without liability insurance, lenders would face greater financial risk, and borrowers could be left struggling to cover expenses out of pocket.

Compliance and Consequences

It is essential to comply with the minimum liability insurance requirements set by your state and lender. Failure to maintain the necessary coverage could result in penalties, repossession of the vehicle, or legal action by the lender. Additionally, lenders may force-place insurance on your vehicle, which is typically much more expensive than a standard policy. Therefore, it is in your best interest to obtain and maintain adequate liability insurance for your loaned vehicle.

Collision insurance

If you decide to purchase collision insurance, you will need to choose a deductible, which is the amount you will pay out of pocket for repairs before your insurance coverage kicks in. Deductibles typically range from $100 to $1,000. A lower deductible will result in higher monthly premiums, while a higher deductible will lower your monthly payments but increase your out-of-pocket costs in the event of an accident.

When purchasing collision insurance, it's important to compare quotes from multiple providers and consider factors such as your driving history, the value of your vehicle, and your desired level of coverage. Collision insurance can provide valuable financial protection in the event of an accident, but it's important to weigh the costs and benefits to determine if it's the right choice for your situation.

Comprehensive insurance

• Vandalism, fire, and explosions
• Windshield and glass damage
• Falling trees, branches, and other objects
• Rocks or objects kicked up by cars
• Storms, hail, wind, floods, lightning, and earthquakes
• Accidents with animals, such as hitting a deer

The cost of comprehensive insurance varies depending on factors such as the value of your vehicle, your location, and your driving record. On average, it costs around $134 per year but can be nearly double that in certain states.

When deciding whether to get comprehensive insurance, consider the value of your car, your financial circumstances, and your personal preferences. If your vehicle is newer and has a high value, comprehensive insurance could save you money on repair or replacement costs. However, if your car is older and has a low value, the coverage may not be worth the price.

Personal injury protection (PIP)

In the US, PIP is required in 15 states and Puerto Rico, with an additional requirement in New York State known as "Basic No-Fault Coverage". The minimum coverage amount is set by state governments and can vary, with maximums usually not exceeding $25,000. For example, in Florida, the minimum PIP coverage required is $10,000. If you were to cause an accident that resulted in injuries requiring medical treatment costing $15,000, your PIP would cover $10,000.

In addition to making medical care affordable, PIP often provides payments for lost income, child care, and funeral expenses related to the accident. Some states offer medical payments coverage, but it typically has low limits and does not cover these additional costs.

Underinsured and uninsured motorist coverage

Uninsured Motorist (UM) coverage is an additional coverage that can be added to a car insurance policy. It is mandatory in many states and highly recommended for all drivers, even in states where it is not required. UM coverage protects you and your passengers from bodily injury caused by a driver with no auto insurance or insufficient insurance. In some states, UM coverage also includes hit-and-run accidents.

Underinsured Motorist (UIM) coverage is similar to UM coverage but applies when the at-fault driver has some liability insurance but their policy limits are not enough to cover the damages or injuries they caused. UIM coverage is typically offered alongside UM coverage and is also mandatory in many states.

Both UM and UIM coverage can be broken down into two types: bodily injury and property damage. Bodily injury coverage pays for medical expenses, while property damage coverage pays for repairs to your vehicle. In some states, UM/UIM bodily injury coverage may also cover non-medical expenses such as pain and suffering.

It's important to note that UM/UIM property damage coverage usually requires the other driver to be identified. If it's a hit-and-run accident and the other driver cannot be identified, collision coverage may be needed to pay for damages to your vehicle.

The minimum limits for UM/UIM coverage vary by state and insurance provider. In New Jersey, for example, the minimum limits for bodily injury coverage are $25,000 per person and $50,000 per accident, while the minimum limit for property damage coverage is $25,000.

To determine the specific requirements and options for UM/UIM coverage in your state, it's recommended to consult with an insurance representative or review your policy contract.

Frequently asked questions