Auto insurance is a basic requirement for car owners. It protects you, other drivers, and lenders who make it possible for people to get a car loan. But just because it is a requirement doesn’t mean you should overpay or get more insurance than you need. The goal is to find the sweet spot where you are paying the least for the protection you need.
Defining Full Coverage and Liability Auto Insurance
-Liability Auto insurance.
Liability coverage only covers damage to other people or property that is caused by you. For example, if you hit another vehicle, your insurance will cover the damage to the other vehicle (up to the limits of your policy), but it won’t cover damages to you or your vehicle. Liability insurance is the basic level of insurance and is required by most states.
-Full Coverage Car Insurance.
Full coverage auto insurance gives you protection if your vehicle is damaged or totaled. It covers your vehicle for both collision and comprehensive damage. For example, if you collide with another vehicle or object on the road, and for comprehensive issues such as if your car was robbed or vandalized, or if damage was caused by weather. Some policies also include coverage for medical bills or even life insurance. Full coverage may be a requirement. Most lenders require you to maintain full coverage insurance if there is an outstanding loan on the vehicle – this covers the auto lender’s interests.
When You Can Drop Full Coverage Car Insurance
Just because you can drop full coverage doesn’t mean it is necessarily a good idea. The key here is balance between risk tolerance and affordability. You don’t want to have more coverage than you need because it is essentially wasting money. You also don’t want to have too little insurance because if something should happen to your vehicle that you cannot afford to fix, you will be out of luck.
For example, let’s say you buy a brand new, $30,000 car with cash. Could you afford to replace that car with cash if you were at fault in an accident and didn’t have full coverage? Maybe. But is it worth saving a couple hundred dollars a year on insurance to take that risk? Probably not.
At its core, auto insurance is the transfer of risk. If you can’t afford to replace your car with cash, it’s probably a good idea to keep full coverage on the car.
When Not to Drop Full Coverage Auto Insurance
You shouldn’t drop full coverage if you don’t have an emergency fund or savings that can handle replacing or repairing your car if an accident occurs. You also shouldn’t drop full coverage if you still owe money on your vehicle, or if your vehicle would cost more to replace than you can afford.
Don’t drop full coverage just because you can. Some people will drop full coverage to limited coverage as soon as they pay off the vehicle. Typically, they will base this decision on their driving track record and assume nothing major will happen that they can’t compensate for out of their own pockets. Accidents are by definition, unpredictable. Anything can happen to anyone at any time.
On the fence about whether or not to drop full coverage? Call AZ Insurance Team to discuss what would be the best option for you.
AZ Insurance Team
*All policies are a little different and this may not be applicable to your insurance policy, talk to your agent to see what your policy covers.*