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Auto Insurance Coverage: What You Need to Know

What Coverage Do Auto Lenders Require?

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

Collision insurance covers damages to your vehicle caused by colliding with another car, striking an object or animal, or hitting a pothole. Comprehensive insurance 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 costs an average of $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, check with your state insurance commissioner’s office or an insurance agent.

Full coverage car insurance includes liability, comprehensive, and collision insurance. On average, a liability-only policy costs $632.33 nationwide, while a full coverage policy costs $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 consider:

How Much Is Your Vehicle Worth?

The maximum payout from comprehensive or collision insurance is the resale value of your car (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 coverage.

A general rule 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 these coverages is $550 and your car is worth less than $5,500, it may make sense to eliminate this coverage.

How Much Savings Do You Have?

Consider whether you can afford to repair or replace your car if it were damaged or totaled. If you have a substantial emergency fund, you might drop comprehensive and collision coverage and save the money for your next car.

If paying for repairs or a new car would be financially challenging, the peace of mind from comprehensive and collision insurance may be worth the cost. You can also explore 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 affect your car’s risk of damage. High-crime areas increase the risk of theft, while regions prone to natural disasters like hurricanes or wildfires pose additional risks. Regularly driving in areas with abundant wildlife can also increase the likelihood of collisions with animals. In these cases, maintaining collision and comprehensive coverage could be wise.

The Bottom Line

Paying off your car can be a significant milestone, and it may allow you to reconsider your auto insurance coverage. While dropping collision and comprehensive coverage could save you money, it’s essential to weigh the potential risks and benefits.

For personalized mortgage services, contact O1ne Mortgage at 213-732-3074. Our team is here to help you with all your mortgage needs.

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