Ask an agent: Frequently asked questions

Question 1: What should I do with my car insurance after paying off my 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:

1. 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?
2. 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.
3. 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.

-Loan-less in Louisiana 

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:

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:

• What is full coverage car insurance?
• Best cheap car insurance options

Question 2: Why does a not-at-fault accident affect my insurance?

I was rear-ended and the other driver paid for the damages to my vehicle through their insurance. When my policy renewed I saw that my rates went up so I called my agent and he told me that the increase was primarily due to the not-at-fault accident which will affect me for three years. If I was not in the wrong then why am I being punished for someone else's negligence?

-Troubled in Texas

Most people understand that if they were at-fault in a car crash then they will likely see an increase in their rates. Unfortunately, not-at-fault accidents can also affect the rate that you pay for car insurance. Because car insurance is all about risk, the more accidents you have, regardless of fault, the higher the probability is that you could be involved in another crash. This means that you pose a higher risk to insure for your company. According to our State of Insurance analysis, a not-at-fault accident raised rates on average $40 per year in 2021. 

Question 3: If I backed into a pole in a parking lot, do I need a police report to file a claim?

I recently backed into a pole in a parking lot resulting in damages with a repair estimate of $1,000. My insurance has a $100 deductible. Full transparency, a couple of years back, I also filed a comprehensive claim after hitting a possum that resulted in about a $2,000 repair. I have a few questions about this. First, and for future reference, do I need to file a police report first to file a claim? And then, should I actually file a claim with my insurance company? And if I do, will my rates go up? 

-Itemizing in Illinois

Firstly, a police report is not always necessary to file a claim, especially for incidents that only involve one vehicle. As for your second question, should you file a claim, the choice will ultimately be up to you. However, I recommend following our step-by-step advice below before deciding to file a claim:

1. Get an estimate for the damage at a local repair shop (which you've already done: about $1,000).
2. See our State of Insurance report and see how much an at-fault accident is in your state. On average, an at-fault accident raised rates to $2,073 in Illinois in 2021. Our data shows that the average premium for IL is $1,395. Meaning, an at-fault accident would increase your premium by $678 per year, an increase of 49%. Most insurance companies will charge you for 3 years for at-fault accidents and claims. Meaning, that $678 will stretch to over $2,000 in fees. Plus your $100 deductible, it's about $700 cheaper to pay for the damage out of pocket than file a claim, according to our data.

Again, the choice to file a claim is completely up to you, but I would caution you that it really is intended for situations where you suffer a catastrophic loss. If you can easily afford the $1,000 repair then I would recommend paying for it out of pocket. The last thing to think about is the difference between this claim and your previous claim. This claim would be considered a collision claim while your previous claim, comprehensive claim, is unlikely to impact your rate. This, as we demonstrated above, won't be the case with this particular claim. If you're interested in learning more about the claims process, see our additional resources here: How to file a claim

Question 4: What's the process for giving someone a car?

I am in the process of giving my son a 1999 Lincoln Towncar. What do I need to do to transfer the car to him?

-Terse in Texas

Here is a simple breakdown of the process in Texas to transfer ownership of the vehicle to your son as a gift:

• You (the giver) and your son (the recipient) will both need to fill out and sign the "Assignment of Title" section on the vehicle's title.
• You will both need to fill out and sign the 130-U form (which is the title and registration application) available to print on the state's website.
• You will both need to fill out and sign the "Gift Transfer" 14-317 form available to print on the state's website.
• The recipient will need to insure the vehicle on his own policy unless he is a member of the giver's household. If your son still lives with you, then he and the vehicle can be added to your policy or he can insure the vehicle on his own.
• You and/or your son will need to submit those documents in person to your county tax office and pay the $10 gift tax.

If the car is being purchased by you and then given to your son as a gift (rather than you already owning the car and gifting to him, as in the scenario outlined above), there are a few steps you will need to take during the purchasing process: 

• If the car is being paid for in cash and the giver is not on the title, the giver will need to secure a picture of the recipient's driver's license and current insurance information.
• If the car is worth over $10K in value, it is likely that the dealer will fill out an IRS cash reporting form, in which case the giver's driver's license will be required by law. Some dealers may also ask that the giver complete a five-line security report for purposes of preventing money laundering. 
• Some states require the giver to fill out additional special forms, like an “Affidavit of Motor Vehicle Gift Transfer” and most tax forms.
• The recipient will need to insure the vehicle on his own policy unless he is a member of your household. If he still lives with the giver, then he and the vehicle can be added to your policy or he can insure the vehicle on his own

After this process is complete then your son will be the titled owner of the vehicle. You can also contact the Texas DMV with any questions on the process.

And for readers in different states, please look up how the process may differ where you live (or ask us for help).