When you pay off your car, the first thing you might consider is dropping full coverage on your vehicle. However, it might not be a good idea to do so. There are some situations in which dropping full coverage on your car is a wise financial decision. However, if you may have trouble paying for repairs or a replacement vehicle if something were to happen, you should probably keep your full coverage car insurance.
What Full Coverage Insurance Covers
Full coverage car insurance usually covers comprehensive and collision coverage. This type of coverage is not required by state law, and its sole purpose is to protect you against high repair or replacement costs if you have an incident.
Some of the things that full coverage car insurance covers are:
- Accidents caused by animals such as deer
- Objects falling on your car
- Weather damage
Your full coverage car insurance also covers damages to your vehicle if you are at-fault in an accident. By contrast, the liability only coverage that is required by the state only pays out medical expenses and damages for the person that you have hit if you are at-fault.
Determining the Value of Your Car
One of the deciding factors for whether or not you should drop full coverage on your car is the value of the car you are driving. There are a lot of factors that go into determining the value of your vehicle.
Some of the things to consider are:
- The age of your vehicle
- Your total mileage
- Wear and tear on the interior
- Defects or rust on the exterior
If the value of your car has greatly depreciated since you purchased it, it may not be worth it to keep your full coverage once it is paid off. Even if you decide to keep full coverage, you may want to adjust your coverage amounts to make more sense for the value of your car. If your car is only worth $4,000 and you have a deductible of $1,000, you will only get $3,000 for your car if it is totaled. If your coverage amounts cover you up to $10,000 property damage, you are paying for coverage that you don’t need and won’t use.
Other Factors to Consider
Once your car is paid off, there is no requirement to keep full coverage insurance. If you think that chances are high that you will be buying a new car in the near future, it could make sense to decrease your car insurance coverage and save that extra money in your budget toward the new car. If your budget has been strained due to paying for full coverage insurance, it may also make sense to decrease your coverage and your premiums.
Another instance in which you might want to drop full coverage on your car would be if you are able to pay for the cost of repairs or replacement on your own without the car insurance. If you have high deductibles on your full coverage insurance, it can make sense to drop the full coverage and save back that money for an emergency fund for repairs.
Also consider that the older your car is the more likely it is to break down. Car insurance doesn’t cover routine repairs not covered by an accident or other covered incident. Socking away money in an emergency repair fund could be a good idea, and dropping full coverage could allow you to do that.
The 10 Percent Rule
A good rule of thumb is to use the 10 percent rule. If your car insurance premiums are more than 10 percent of the amount you would get if your car is totaled, you probably don’t need full coverage insurance. For example, if your premium is $300 per month and your car is only worth $3,000 with a $1,000 deductible, you would only be getting $2,000 if your car were totaled. Instead of paying that $300 a month, reduce to liability only coverage to save a couple hundred a month and save it back for repairs or a new vehicle.
On the other hand, if your car insurance is $300 per month and your vehicle is worth $10,000 with a $1,000 deductible, you would be getting $9,000 if your vehicle were totaled. In this instance it is better to keep your full coverage insurance because you would not be able to easily repair or replace the vehicle on your own.