Typically when you buy a new car, your lender requires you to have particular car insurance. The requirement is to protect the lender’s investment in your car if there is any damage to the car. It also saves you from paying a hefty amount out of your pocket if you caused damage to the car in an accident.
It would be best if you carried car insurance until a lender financed you. If you cancel the contract at any point, the lender will sue you for the breach of contract along with a full coverage cost of the insurance to your existing car loan. The addition of the forceful full coverage to a car loan is called force-placed coverage.
What Amount of Insurance Do Lenders Require?
Typically, lenders require full coverage. It is more than the minimum requirement of the state. The full coverage of car insurance usually comprises of:
- Collision Coverage
It provides coverage to your car when damage is caused by a collision with another car or object.
- Comprehensive Coverage
It provides coverage for the damage to your car caused by accidents that don’t involve collisions. Such as fire, lightning, vandalism, wind, hail, or theft.
Liability insurance provides coverage to others’ bodily or property damage caused by a driver in an accident.
- Medical Payments Coverage
It provides coverage for the driver and other passengers’ medical bills that might face an accident, regardless of who is at fault.
Uninsured/Underinsured Motorist: It provides coverage for accidents involving drivers who don’t have car insurance.
Why Is Full Coverage Required?
Every person who financed a car must carry full coverage car insurance until the car loan’s balance is zero. Technically, the lender remains the owner unless any balance of the loan is left. It is a kind of protection that a lender requires to make sure their investment is safe.
For instance, a financed car has $6000 left on loan and is total in an accident that was the driver’s fault. The driver is still required to pay the remaining amount of the loan. It is where the full coverage auto insurance comes into action.
If the driver only had basic liability coverage, the car insurance company will not pay a single penny towards the claim. Also, if the driver has full coverage, the insurance company will pay the remaining amount of the loan to the lender, covering their investment damage.
However, once the financed car is loan-free, the driver can choose to downgrade basic liability coverage. But it is recommended to evaluate the situation and choose whether liability or full coverage is best for them.
When Can You Change to Basic Insurance?
After your car is fully paid off, your dealership will no longer require you to have full coverage. But make sure to consider before you drop your insurance policy to basic coverage, as with minimum liability, you cannot cover all the bodily or property damages to you or other passengers caused by accident. If you drop to basic liability insurance, it is quite possible that you have to pay for the damages such as repairing the car and medical bills out of your pocket in an accident.
Make sure you discuss it with your insurance agent before dropping to basic coverage. Many agents recommend the drivers continue having full coverage unless the car’s value becomes less than the insurance cost. The value of older model vehicles depreciates with time; thus, many insurers don’t insure older vehicles whose worth is less than the cost of car insurance. You might have minimum liability insurance if the cost of repairing or replacing your vehicle out of your pocket is less than what it would require to insure it.