August 31, 2020
Agency
Car Insurance for Vehicles You Have Paid Off
If you finance a new car, your loan allows you to pay off the cost of the car over time. However, it might also require you to buy certain car insurance. All the same, once you pay off your loan, you might be able to drop some of this coverage. Still, you will always have to carry some level of coverage, and should probably carry more for as long as you drive. Still, removing certain coverage might help you make your policy more affordable. Here’s how it works.
Coverage Required of Financed Vehicles
In 49 states, all drivers must carry certain levels of liability insurance and other coverage. You will have to carry this coverage regardless of whether you drive a new or used car.
However, if you buy a new car and finance it, then your lender will likely require a few extra types of coverage like:
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Collision insurance: Coverage pays for damage to the vehicle that it sustains in a wreck.
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Comprehensive insurance: If a non-accident hazard (fires, weather, theft, vandalism) damages the car, then this coverage can pay for the repairs.
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Gap insurance: If damage totals your car, then your collision or comprehensive coverage might pay you only the car’s value at the time. Gap insurance closes the space between a car’s used value and the outstanding loan.
Usually, you can add this coverage into the same policy as your liability insurance. Though this might increase your premium, such an increase is manageable in most cases. You can usually save money too, through discounts.
Dropping Coverage After Paying Off a Loan
Once you pay off your loan, you might see no reason to continue to carry collision, comprehensive or gap coverage. However, this might not be the best idea in all cases.
Yes, you can often drop your gap coverage because it will no longer serve a purpose since you no longer have a loan. However, your collision and comprehensive coverage might still be able to protect you. If you want help paying for vehicle repairs or for replacing a totaled vehicle, then your policy might still assist you.
Remember though, that your collision and comprehensive coverage will contain deductibles. Your insurer will subtract the cost of the deductible from your settlement. If your vehicle value is less than the deductible limit, then your policy won’t pay if you total the car. Therefore, keeping collision and comprehensive coverage might not be worthwhile.
To decide if you should keep your physical damage coverage, talk to your agent about the value of your car. They can help you decide if you realistically need this coverage on an older, paid vehicle.