Do you have to have full coverage on a new car?

No, you do not need full coverage on a paid off car. Full coverage car insurance is only necessary when a car is not paid off yet and the lender requires full coverage, as there isn’t a legal requirement to carry full coverage anywhere in the United States. Insured drivers always have the option to add full coverage to their paid off car if they want to, though, and it can be a good idea.... read full answer

For example, you should have full coverage on a paid off car if you want to make sure your insurance will pay for the car to be repaired or replaced, especially if the unexpected expense would be a financial hardship. Without the collision and comprehensive insurance that’s usually part of full coverage, you’ll have to pay for damage to your vehicle yourself in the event of an accident, theft or other incident.

You should also take the age, mileage, and replacement cost of your vehicle into consideration when debating whether or not you need full coverage on a paid off car. If you own an older car, full coverage might not make sense financially because the vehicle isn’t worth as much anymore.

Ultimately, there’s no universally right or wrong answer when it comes to whether or not you need full coverage on a paid off car. Your decision should depend on several factors, including your personal financial situation, your driving habits, and the vehicle itself. Talk to your insurance provider to discuss what would be best for you.

You should have liability-only insurance if the annual cost of full coverage exceeds 10% of your car’s value. At that point, the extra coverage might not be worth the added cost of paying for more than liability-only insurance. But this is just a general rule of thumb, and the decision to switch to liability-only insurance depends on state coverage requirements and each driver’s financial situation.... read full answer

When Liability-Only Insurance Is Worth It

The main advantage of liability-only insurance is that you’ll save on your premium. Since liability insurance offers minimal protection for the policyholder, it is less expensive than full coverage insurance.

However, if your car is damaged by an accident that you cause or another damage-causing event, then you’ll have to pay for the repairs out of pocket. If you have the financial means to pay for repairing or replacing your car, and your state doesn’t require you to have any other types of insurance, then you could take the risk of switching to liability-only insurance.

Liability-Only Insurance & State Coverage Requirements

Liability only insurance pays for other people’s property damage and injuries resulting from accidents that you cause. Almost every state requires that drivers carry a certain amount of liability insurance.

Some states also require drivers to carry other types of insurance, including uninsured/underinsured motorist coverage and personal injury protection (PIP). If your state requires you to have multiple types of coverage, then you cannot legally drive with liability-only insurance.

Liability-Only Insurance vs. Full Coverage

If your state allows it, then you’ll need to decide whether to purchase liability-only insurance or full coverage. Full coverage insurance generally refers to a policy that includes both collision and comprehensive coverage. Collision insurance covers damage to your vehicle after an accident. Comprehensive coverage, on the other hand, pays to repair or replace your car if it’s damaged by something other than an accident, like vandalism or a natural disaster.

If your car is leased or financed, you will likely be required to carry full coverage insurance. Even if your car is paid off, you shouldn’t purchase liability-only insurance if your vehicle is still worth a lot or you’re not in the financial position to pay to repair or replace it. Liability-only insurance could also be risky if you live a high-traffic area where your vehicle is more likely to be damaged.

If the insurance lapses on a financed car, the lender will usually buy force-placed insurance – an expensive policy that you’re required to pay for – or even repossess the car. Your initial lending agreement will have a clause detailing what happens if insurance coverage lapses on the financed car, so check your contract for specifics.... read full answer

Force-placed insurance is a costly option that should be avoided, because it is designed to protect the lender’s best interests rather than the driver’s. Force-placed insurance prioritizes the car itself over liability coverage, meaning that it usually doesn’t fulfill the state’s mandatory minimum requirements. As a result, if you’re driving a car with force-placed insurance, you could be paying a lot of money but still violating the law.

Driving without insurance can carry heavy penalties, so if your lender hits you with force-placed insurance, it’s best to quickly find your own policy that fulfills your state’s minimum requirement. As soon as you show your lender proof of enough insurance to fulfill your contract’s requirements, they will remove the force-placed policy. Remember that a financed car will need to carry the state’s mandatory minimums for insurance coverage as well as whatever the lender requires. Lenders often demand additional collision or comprehensive options in order to protect their investment, so be sure to read the contract’s fine print.

When an Insurance Lapse Could Lead to Repossession

Depending on the terms of your contract, your lender might repossess the car if you allow its insurance to lapse. In many states, including California and Florida, your lender can repossess your car without warning if you let your insurance lapse for even a day. Other states, like Massachusetts, require lenders to wait 10 days and then send a notice before repossessing a car. Cars can be repossessed almost anywhere, including your property, as long as the repossession company does not “breach the peace” – threaten, injure, or cause damage – to do so.

Ultimately, lenders are more likely to impose force-placed insurance than repossess your car for a lapse in insurance. But if you fail to pay for the force-placed insurance, repossession begins to look better and better to the lender. And if your state and contract allow it, your car might even be repossessed if you have insurance that doesn’t quite fulfill the lender’s requirements. That’s especially important because repossession is expensive in the long run. The lender often auctions off the car for less than you owe, leaving you responsible for the difference.

What to Do About an Insurance Lapse on a Financed Car

Since having a car get repossessed is clearly a worst-case scenario, the best solution is to keep your insurance from lapsing in the first place. Proactive strategies include paying via automatic deduction, responding immediately to a cancellation warning, and talking to your insurer and lender about suspending or decreasing coverage if you’re being deployed or moving abroad for a time.

If you’re struggling to afford insurance, letting your coverage lapse will actually cost you more in the long run. Instead, contact your insurer and be honest about your finances – they might allow you to delay payments or set up a payment plan. You should also check out WalletHub’s cheap car insurance guide and tips for to how to lower your car insurance costs.

If a lapse is unavoidable or has already happened, call your previous insurer and ask to be reinstated. If it’s too late to continue your old policy, compare quotes for new policies immediately. Bear in mind that lapses are expensive – your old insurer may charge you a fee to be reinstated, and new insurance companies will consider you higher-risk because of your past lack of coverage. But if your insurance already lapsed on a financed car, it’s best to mitigate the damage by getting coverage as soon as possible.