What should I do with my car insurance after I pay off my car loan?
I just paid off the bank-financed loan on my 2010 Volkswagen Jetta and I had a few questions about the next steps with my car insurance:
- Should I let my insurance company know the car loan is paid off? If so, should I wait until I have the title in my possession?
- Will I save money on my insurance now that I own the vehicle? I'm currently insured with GEICO and have been with them for six-plus years.
- I currently have full coverage on the car. Do you think it would be worth it to switch to a lower type of coverage? I'm thinking of switching to liability, but want to know the pros and cons of liability vs a higher type of coverage for a car that's maybe only worth $5,000.
Congratulations! Paying off your car is a huge accomplishment.
1. Yes, let your car insurance company know: It is a good idea to notify your car insurance company of the loan payoff so that you can remove the lienholder from your policy. This means that if you maintain comprehensive and collision (full coverage) and your vehicle were to be totaled in an accident, the payout from the insurance company for the damage would go to you instead of your bank. Even if you forgot to remove the lien holder and your car were totaled, then the bank that held your loan would simply send the funds to you. It is not necessary to wait for the title before notifying your insurance company of the completion of your loan.
2. Not necessarily: Simply owning your vehicle does not have an effect on the rate that you pay, however, it does allow you more coverage options. In most cases when financing a vehicle, whoever you are financing your vehicle from will require you to carry additional coverage such as lease/loan payoff, comprehensive, and collision coverage. For collision and comprehensive coverage, you're usually required to carry low deductibles as well -all of which makes your premium more expensive. But when you own your vehicle, you have the freedom to choose which and how much coverage you actually want. The below chart, based on annual State of Insurance report, shows how your annual premium could change depending on the coverage you choose:
|Coverage Options||National Average Annual Premium|
|State minimum (liability-only)||$583|
|50/100/50 BI-PD with $500 comp-coll||$1,483|
|50/100/50 BI-PD with $1,000 comp-coll||$1,317|
This brings us to the last part of your question: how much coverage do you need?
3. It depends on the value of your vehicle: The answer to your third question is subjective and up to each individual to decide what suits their needs best. That being said, you should try to get a fairly accurate idea of your vehicle's actual cash value (ACV) since that is what your car insurance company would pay if your vehicle were totaled as of today. Just having a "full coverage" policy doesn't guarantee the amount you would receive from the insurance company if the vehicle was totaled. Most insurance companies will only give you what the value of your vehicle is worth today, not what you originally paid for it.
A general rule of thumb in the insurance world is if your vehicle is worth less than $4,000, it might be a good idea to drop full coverage, i.e., your comprehensive and collision coverage. This is because you're generally thought to be overpaying for your car insurance based on the value of your vehicle, the cost of having collision and comprehensive coverage, as well as your deductible (as you would have to pay your deductible in the event you were to file a claim). Together, these undervalue the amount of money you would receive from your insurance company. It might make sense to continue to carry comprehensive and collision based on your car's value, but dropping your coverage to liability is likely to significantly drop your rate. Luckily for you, most insurance companies can quote changes to your existing policy without actually making the change effective so you can make a more informed decision. I would contact your insurance company's customer service department and ask for an estimate. Furthermore, you can also raise your deductible in order to save on your average premium. Because your deductible and car insurance premiums are inversely related: if you raise one you lower the other.
For more information regarding full coverage versus liability and other ways to save on car insurance, see our additional articles: