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Paying off your car is an accomplishment to savor. In addition to saying "so long" to car payments, can you expect your car insurance costs to drop too? While your car insurance rates won't automatically decrease once your car is paid off, your coverage requirements will change in ways that could result in premium savings.
What Coverage Do Auto Lenders Require?
While 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 pays to repair damages to your vehicle caused by colliding with another car, striking an object or animal or hitting a pothole. Comprehensive insurance pays for damages to your vehicle not caused by collisions. This includes theft, fire, vandalism or tornadoes, as well as a cracked or broken windshield.
Nationwide, collision insurance costs an average of $377.33, while comprehensive coverage costs an average of $179.84, according to the National Association of Insurance Commissioners (NAIC).
What Coverage Is Required for Cars Without Loans?
Whether a car is leased, financed or owned outright, most states require drivers to have a minimum level of liability insurance in order to drive. Liability insurance covers bodily injury and property damage to other people due to an accident you cause.
Minimum liability coverage requirements vary from state to state. For the 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. Liability-only coverage costs significantly less than full-coverage insurance. On average, a liability-only policy costs $632.33 nationwide, according to the NAIC, while a full coverage policy costs an average of $1,189.50.
How to Decide Whether to Decrease Auto Insurance on Your Car
Once your car is paid off, you could drop comprehensive and collision coverage—but should you? Here are some factors to consider when making this decision.
How Much Is Your Vehicle Worth?
The maximum amount that comprehensive or collision insurance will pay out if your car is totaled is the resale value of your car (minus your deductible). If your car is only worth a few thousand dollars and you have a $1,000 deductible, the payout you receive may not be enough to make this coverage worth the cost.
One rule of thumb is that you should drop collision and comprehensive coverage if your vehicle is worth less than 10 times the annual cost of both kinds of coverage combined. For instance, 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. If your car is worth $20,000, on the other hand, keeping comprehensive and collision coverage probably makes financial sense.
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How Much Savings Do You Have?
Your car's value isn't the only consideration when purchasing comprehensive and collision insurance. Can you afford to repair your car if it were damaged—or, in the worst-case scenario, to replace it altogether if it were totaled?
If you have a hefty emergency fund and could cover these unexpected costs without financial hardship, you may want to drop comprehensive and collision coverage. You could even put the savings into a sinking fund for your next car.
On the other hand, if paying for car repairs or buying a new car would leave you financially strapped, the peace of mind that comprehensive and collision insurance can bring may be worth a few hundred dollars a year. Instead, you can 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?
Depending on where you live and drive, your car may face higher-than-average risks. For example, if you live in a high-crime area, your vehicle could be at risk of theft.
Cars are also more prone to damage in areas where natural disasters, such as hurricanes or wildfires, are common. Regularly driving roads with lots of wildlife could increase your odds of colliding with a moose or deer. In these situations, maintaining collision and comprehensive coverage could be a smart move.
The Bottom Line
Once your car is paid off, canceling your collision and comprehensive coverage could save you several hundred dollars a year. But should you prefer the safety net of full coverage car insurance, there are plenty of other ways to lower your premiums.
For instance, simply shopping around and comparing car insurance prices could help you find a more affordable policy. Using Experian's auto insurance comparison tool, you can input your information once and get quotes from multiple car insurance carriers all in one place. It's an easy way to save time that could save you money too.