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UPDATED: Mar 13, 2020
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If you’re financing a vehicle, you have little choice about what coverages your policy will contain; your lien holder will determine what the insurance policy should require. People who own their own cars, however, are faced with the choice between maintaining full coverage insurance or dropping down to a liability-only policy. While liability policies are cheaper, they also do not provide protection against damages that your vehicle may sustain.
Depending on your circumstances, a liability-only policy may or may not be worth the reduced cost of premiums. In some cases, the policy may not be cheap enough to warrant the loss of coverages; in other cases, maintaining full coverage could be a waste of money. It’s up to you to research your options and make the best choice for your individual needs.
Full Coverage vs Liability
Basic liability insurance is required by the state. Before you can register a vehicle, you need to prove financial responsibility for any damages the car may cause; in most cases, this means having an active insurance policy with sufficient liability limits. Once that has been accomplished, you can legally drive a vehicle.
Liability insurance only pays for damages that you cause. It will not cover the repairs to your own vehicle. In order to have your vehicle repaired, you would need to carry full coverage insurance. This is a type of first-party coverage that pays for damages your vehicle sustains regardless of who is at fault for an accident; as long as the vehicle is damaged by a covered peril, the repairs will be paid by the insurer.
The two primary first-party coverages are collision and comprehensive. They are purchased separately, so it’s possible to have a policy with just one or the other, although most “full coverage” policies do include both. Collision pays for damages incurred during a car accident. Comprehensive pays for all other types of sudden damage, like from weather, vandalism and theft.
Unlike liability insurance, which pays up to a designated limit with no deductible, first-party coverages pay up to the worth of the vehicle. The insured owes a deductible at the time repairs are completed, but all costs over the deductible amount are paid by insurance.
How Much Will I Save by Dropping Full Coverage?
The more coverages included on a policy, the more the premiums will cost. The most bare-bones liability policy will always be the cheapest because it requires minimal pay-out from the insurer. The more money the insurance company will need to pay for claims throughout the life of a policy, the more the policy itself will cost to maintain.
Generally, insurance companies assign a base price to each coverage. Not all coverages cost the same amount. Liability insurance makes up the bulk of a premium, followed by medical coverages and then first-party damage insurance. The exact amounts charged for an individual coverage will vary from one insurance company to the next, however, and most people are not charged the base rate.
An individual’s premiums are determined largely by their driving history, gender, credit score and other factors that affect their risk. People with a high risk of being involved in an accident pay more for insurance than low-risk drivers. Insurance companies calculate premiums by taking the base rate for coverages and adding or subtracting costs based on risk.
It’s important to realize that risk factors do not affect all coverages equally. For example, if you have a rare or expensive vehicle, your first-party coverages will cost more than if your car is cheap to repair. If you have a history of car accidents, your collision and liability insurance will cost more, but your comprehensive coverage will not be affected. Similarly, if you live in an area that gets frequent hail storms, your comprehensive coverage will cost more.
Because of the complex interplay between risk, coverages and cost, it’s hard to know exactly how much your premiums may increase or decrease as a result of a policy change. A full-coverage auto insurance policy may cost twice as much as a liability-only policy, or it may be just a few dollars more per month. The only way to know for sure is to get a quote from an insurance company.
Predicting the Cost of Coverages
In order to budget for your auto insurance, you’ll need an accurate guess of how much your policy will cost. If you already have insurance, you can contact your agent to get an estimate of what might happen if you drop coverages. The figure you get should be very accurate, and you won’t be locked into anything if you decide you don’t want to modify the policy after all.
Most insurance companies also offer a website where you can review your coverages and make changes. This should allow you the opportunity to see what would happen to your premiums if you dropped collision, increased your deductible or reduced your liability limits. If you like the figure, you can accept the changes and modify your policy accordingly.
If you do not already have car insurance, you will need to obtain a quote from an insurance company for both full coverage and a liability policy. The easiest way to do this is to submit for a quote online for a full-coverage insurance policy, then ask the representative to calculate the liability-only option when they call. This will ensure that you get the best price and most realistic estimate.
Once you know how much you can expect to pay for coverage, you can decide whether it’s worthwhile to maintain full coverage or if you should drop to a liability policy. Also be sure to ask your insurance company if there are other ways save, such as discounts, that will reduce your premiums without sacrificing protection.