“Understanding Auto Insurance Requirements for Paid-Off Cars”

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What Coverage Do Auto Lenders Require?

When your car is leased or financed, lenders typically mandate that you carry both collision and comprehensive insurance. This ensures their property—the vehicle—is protected until your lease or loan term concludes.

Collision insurance covers damages to your vehicle caused by colliding with another car, striking an object or animal, or hitting a pothole. Comprehensive insurance, on the other hand, covers damages not caused by collisions, such as theft, fire, vandalism, or natural disasters.

According to the National Association of Insurance Commissioners (NAIC), the average cost of collision insurance is $377.33, while comprehensive coverage averages $179.84.

What Coverage Is Required for Cars Without Loans?

Regardless of whether a car is leased, financed, or owned outright, most states require drivers to have a minimum level of liability insurance. Liability insurance covers bodily injury and property damage to others in an accident you cause.

Minimum liability coverage requirements vary by state. For specific auto insurance coverage minimums in your state, consult your state insurance commissioner’s office or an insurance agent.

Full coverage car insurance includes liability, comprehensive, and collision insurance. Liability-only coverage is significantly cheaper than full-coverage insurance. On average, a liability-only policy costs $632.33 nationwide, while a full coverage policy averages $1,189.50, according to the NAIC.

How to Decide Whether to Decrease Auto Insurance on Your Car

Once your car is paid off, you might consider dropping comprehensive and collision coverage. Here are some factors to help you decide:

How Much Is Your Vehicle Worth?

The maximum payout from comprehensive or collision insurance if your car is totaled is its resale value (minus your deductible). If your car is worth only a few thousand dollars and you have a $1,000 deductible, the payout may not justify the cost of the coverage.

A common rule of thumb is to drop collision and comprehensive coverage if your vehicle is worth less than 10 times the annual cost of both coverages combined. For example, if your annual premium for collision and comprehensive insurance is $550, and your car is worth less than $5,500, it may make sense to eliminate this coverage. Conversely, if your car is worth $20,000, maintaining comprehensive and collision coverage likely makes financial sense.

How Much Savings Do You Have?

Your car’s value isn’t the only consideration. Can you afford to repair or replace your car if it were damaged or totaled?

If you have a substantial emergency fund and could cover these unexpected costs without financial hardship, you might want to drop comprehensive and collision coverage. You could even allocate the savings to a fund for your next car.

However, if paying for car repairs or buying a new car would strain your finances, the peace of mind that comprehensive and collision insurance provides may be worth the cost. Instead, look for other ways to lower your car insurance bill, such as bundling home and auto insurance or taking advantage of low-mileage discounts.

Do You Live in a High-Risk Area?

Your location can also influence your decision. If you live in a high-crime area, your vehicle may be at higher risk of theft. Similarly, areas prone to natural disasters or with abundant wildlife can increase the likelihood of damage to your car. In these cases, maintaining collision and comprehensive coverage could be a wise choice.

The Bottom Line

Paying off your car is a significant milestone, and it may allow you to save on insurance premiums by canceling collision and comprehensive coverage. However, if you prefer the security of full coverage car insurance, there are other ways to reduce your premiums.

For instance, shopping around and comparing car insurance prices can help you find a more affordable policy. At O1ne Mortgage, we are committed to helping you find the best mortgage services. Call us at 213-732-3074 for any mortgage service needs. Our team is here to assist you in making informed decisions and saving money.

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