10 Things to Consider About Insurance When You Pay Off Your Car Loan

The following information is not advice, it’s just my thoughts and opinions. I’m just a girl on the web, not currently licensed in insurance or anything else in any state. You should absolutely seek the counsel of an insurance agent licensed in your state before taking any action at all. Coverages and programs discussed may or may not be available in your state.  Coverage and descriptions are summaries, subject to the terms and conditions and definitions in your own policy .  Talk to your agent!

PT at Prime Time Money just paid off his car, and he wrote a post about the decision he must make about what to do with the extra money.  He mentioned the possibility of changing his insurance coverage now that he no longer has a loan.  I, being me, always have something to say, and that’s especially true when insurance is a topic.

So, should you change your insurance when you pay off your car loan?

That depends.  Here are some things to consider:

Only two coverages have anything to do with the type of car you have: Comprehensive and Collision.  Those are the only two coverages that cover the car itself.    That’s why the lienholder requires it – they don’t care if you’re hurt or if you hurt someone else; they just care that their collateral is covered.

Collision covers damage to your car when your car hits or is hit by another vehicle,  or other objects.  It pays whether the incident is your fault, no one’s fault or a hit and run.  Most people carry a deductible, so the insurance pays the amount of loss after your deductible is reached (paid by you).

Comprehensive (also called Other Than Collision) covers most other things that physically happen to the car – if it’s stolen, damaged by a hurricane, flood, falling object, or animals. Most people carry a deductible, so the insurance pays the amount of loss after your deductible is reached (paid by you).

So, what should you think about doing?

  1. Find out how much you pay for each of those coverages, and determine your deductible.
  2. Get quotes for raising the deductible(s) and for eliminating the coverages altogether. Get the quotes for each individual coverage so you can see what they cost separately, for all your cars.
  3. Consider what you’d be giving up. I suspect you’ll find that you won’t save as much as you think, especially with Comprehensive coverage.  Also, keep in mind that if you remove them you will be completely out of luck if you get into an accident that is your fault, if it’s a hit and run or if the at-fault party doesn’t carry enough coverage to fix your car (Florida only requires $10000 property damage coverage.  Have you thought  about what happens if they hit more than one car, or if you drive something that $10000 wouldn’t fix?).  Also, you’d have no coverage if it’s stolen, damaged in a hurricane, etc.
  4. Figure out how much of a loss you could absorb without too much financial difficulty. Compare it to the cost of the coverage. Could you come up with the money to replace your car to fix it if the damage is $1000?  $5000?  If it is a total loss could you replace it?  Is it worth it to you to spend X dollars for that peace of mind?
  5. Figure out how much of a loss you could absorb without too much mental/emotional difficulty. Will you be able to sleep at night knowing that you’re not covered?  Is it worth it to you to spend X dollars for that peace of mind?
  6. Consider starting a Deductible Fund.  Think about increasing the deductibles on all of your insurance (including health insurance) and putting that into a fund to pay those deductibles if you incur a loss.  You might be amazed at the money you can save, and over time you’ll almost always come out ahead (well, unless you’re really unlucky). I used to write an individual health policy where the difference in premium between the $500 deductible and the $1000 deductible was  (depending on the insured approximately) $600 per year – more than the deductible difference!  If you chose the $500 deductible you started off $100 in the hole.  Ridiculous. If the patient chose the $1000 deductible they paid less, and if they didn’t get sick they could save as much as $600!  That’s what they call a no-brainer.
  7. If you decide to drop these coverages, consider keeping just Comprehensive. It doesn’t cost much at all, and in many states you can get your windshield replaced if broken without having to pay your deductible.  Many of my clients kept Comprehensive with the largest deductible just for the glass coverage.  My company actually would replace any of the glass on the car (side glass, mirrors) without requiring the insured pay their deductible, and the coverage often cost about $10 every six months.
  8. You don’t want to reduce your liability or uninsured motorist coverage. They have nothing to do with the type of car you drive – you can do just as much damage with a brand new car as an old clunker!  In fact, you may want to get quotes to increase these coverages…
  9. Consider getting quotes from other companies. Hey, as long as you’re doing the work.  And if you do, read my series on  Auto Insurance 101 to get some good tips!
  10. Don’t forget to remove the lienholder! Make sure your insurance agent removes them as the loss payee – sometimes they forget.  It’s not that the bank could actually collect the insurance money if you had a loss, but it would delay your payment at claim time while they straighten it out.

Everyone’s risk tolerance is different.  There’s a reason why “insurance” is synonymous with “risk management”.  Whatever you decide, make sure you can sleep soundly.

And to anyone who pays off their car loan, congratulations!!!!


If you liked this post, check out these related posts:

Auto Insurance 101: Part 1 ~ Before We Shop Let’s Understand What We Have

Auto Insurance 101: Part 2 ~ 10 Tips for Shopping Smart

Auto Insurance 101: Part 3 ~ What to Do With The Quotes Now That You Have Them

8 Responses to “10 Things to Consider About Insurance When You Pay Off Your Car Loan”

  1. funnyaboutmoney1 Says:

    Interesting considerations.

    Last time I called The Hartford to ask about savings from raising the deductible, it was all of about $20, hardly enough to make the change.

    Now that I have an umbrella policy, they’ve raised my car insurance through the roof — the umbrella policy is actually an auto insurance policy, even though it covers all sorts of situations. So I raised the deductible on the house…and then a day later darned near set fire to the kitchen by wandering off and forgetting a pot on the stove. Yipes!

    I hate paying for insurance. But I think I’d hate the results of not having enough coverage even more. 😉

  2. BeThisWay Says:

    Funny, your situation isn’t unusual. I’d say 75% of my clients kept their coverages intact after paying off a loan, and another 20% kept Comprehensive. The difference just wasn’t worth the risk to them.

    Actually, Umbrella policies aren’t auto policies (though perhaps your insurer writes them through their auto company, and if a person’s auto and homeowners are with different companies it is usually the company that has the auto policy that carries the umbrella). They are considered a “fire” policy, like a homeowners, boat, personal articles, etc. It is certainly true, though, that most of our liability risk stems from our use of an auto. It is an aptly named policy, as it provides an umbrella of protection over your underlying auto and homeowners/personal liability.

    I think we all hate paying for insurance. I certainly do! t’s my biggest monthly expense other than my mortgage. The trick is to find the balance of coverage that works for our risk tolerance.

  3. PT Money Says:

    Wow. Way to break it down into the nuts and bolts. I still haven’t called my insurance, but I will use this as a nice guide for making my decision. Thanks for mentioning my post and for running with it. Have a great week.

  4. Mr Geek Says:

    I don’t know if things work the same for you as it is over here, but I have had something similar here. The problem with these additional levels of cover in the UK is that once you claim on them, you end up getting mauled on any future cover.

    Interesting post though.

  5. Jeremy Schaedler Says:

    The idea of a deductible fund is a great concept to get on the road to self insurance. Just by increasing your deductibles, practicing good driving habits and saving the amount of your reduced insurance premiums, a person can build a sizeable nest egg. Best of all, if no claims occur, that money is in your hands rather than the insurance company’s.

  6. livrariajoaosoares.com Says:

    If you have insurance, you are eligible to receive up to the maximum insurable amount stated in your insurance policy. Unfortunately, insurance companies try to save money on your own when possible, so the collection of insurance after an accident has occurred can be stressful.
    I hope you have been monitoring the maintenance of your vehicle, if so, please send copies of insurance company records maintenance.
    If after providing such evidence, the insurance company does not cooperate, you may consider useful research papers written about property damage and insurance claims.



    • BeThisWay Says:

      No, the payment will not change. There is no additional charge for simply having a loan. The price for comprehensive and collision is based on the loss factors/costs/experience for your vehicle and your own personal rate tier.

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