Q

Do you need full coverage car insurance on a financed car?

A

Yes, drivers who finance their cars are typically required to have full coverage car insurance, meaning car insurance that includes collision and comprehensive coverage.

Stephanie Nieves author photo

By

Stephanie Nieves

Stephanie Nieves

Property and Casualty Insurance Expert

Stephanie Nieves is an insurance editor at Policygenius in New York City, specializing in home and auto insurance. Her work has appeared in Business Insider, PayScale, Fairygodboss, and The Muse.

Published August 24, 2021|4 min read

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“Full coverage” car insurance isn’t an actual type of policy, it typically just means car insurance includes comprehensive and collision coverage in addition to liability. A full coverage policy covers both damage and injuries you cause in an accident and damage that can happen to your car, even if it’s totaled. 

Drivers who finance their vehicles (meaning anyone with a car loan) are required by their lienholders to have full coverage car insurance for the life of their loan. The lienholder has a vested interest in that vehicle, so they want to make sure it’s fully protected.

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Once you’ve paid off your loan, you may choose to drop comprehensive and collision coverage to save money — but unless you can afford to pay out of pocket to repair or replace your car, this can leave you unprotected. 

Key Takeaways

  • Yes, you need full coverage car insurance if you’re financing a car (meaning you are making payments on a car loan)

  • A full coverage car insurance policy is one that includes comprehensive and collision coverage in addition to liability

  • Comprehensive and collision coverage cover your car if it is damaged, destroyed, or stolen 

  • Once you’ve paid off your loan, you can drop comprehensive and collision coverage, and just keep liability — but this means damage to your car may not be covered

Do I need full coverage on a financed car?

Yes, drivers who finance their car are typically required to maintain full coverage car insurance for that vehicle. Until the loan is paid off, the lienholder owns a percentage of your car and requires full coverage to protect their investment. If your car is totaled in an accident, a full coverage car insurance policy would pay to repair or replace your vehicle up to its actual cash value.

Let’s say you slam into a telephone pole and your car is badly damaged. Your collision coverage will pay for your vehicle repairs up to the cost to replace your car in its previous condition — but without collision coverage, your insurance wouldn’t cover the damage.

What is full coverage auto insurance? 

A full coverage car insurance policy isn’t actually a specific product, it just refers to a policy that includes comprehensive and collision coverage in addition to liability coverage. Liability coverage is what covers damage you’re liable for when you cause an accident, while comprehensive and collision coverage cover damage to your car when you are and aren’t driving.

A minimum amount of liability insurance is required in almost every state, while collision and comprehensive and collision coverage aren't required by law in any states, but they are typically required if you finance your car. 

A full coverage car insurance policy typically includes:

Coverage typeWhat it does
Bodily injury liabilityThe part of your liability coverage that pays for medical bills and expenses if you've injured someone in an accident
Property damage liabilityThe other part of liability coverage, covers the cost of property damage you've caused in an accident
Personal injury protectionCovers medical expenses for you or your passengers after an accident, required in some states
Uninsured/underinsured motoristCovers the costs if you're in an accident caused by a driver with little or no car insurance
ComprehensiveCovers damage to your car that happens when you're not driving
CollisionCovers damage to your car after a car accident, no matter who was at fault

How much does full coverage car insurance cost?

The cost of a full coverage car insurance policy depends on lots of different factors that affect your rates, like your age, location, driving history, and the make and model of your car. The cost of your policy will also depend on how high you set your coverage limits. But we can look at the average cost of car insurance to get an idea of how much a full coverage policy would cost you.

According to a 2021 report from the National Association of Insurance Commissioners, the average cost of auto insurance in the U.S. is around $1,190 per year (or about $99 per month). 

Type of coverageAverage annual cost nationwide
Liability$644.11
Collision$377.62
Comprehensive$167.91

Can I drop full coverage once I've paid off my car loan?

Yes, you can technically drop comprehensive and collision once you’ve paid off your car loan — but this isn’t a great idea unless you can afford to replace your car out of pocket, or if the total value of your car is less than your deductible.

If you reduce your coverage to just liability, you’ll only be covered for damage you cause in a collision, but damage that happens to your car would not be covered. And you wouldn’t be covered at all if, say, a heavy tree branch falls on your car or it’s stolen and stripped for parts. While this could save you hundreds of dollars on your premium, it may cost you a lot more in the long run if your car is damaged or totaled in an accident.

You should keep full coverage on your car ​​if you can’t afford to replace it if it is totaled. If your car is paid off and you can afford to fully replace it out of pocket, then you can skip out on comprehensive and collision coverage if you want. You can also drop comp and collision coverage if your premiums for both equal 10% or more of your car’s actual cash value. Otherwise, we recommend keeping full coverage.

How to buy insurance for a financed car

Unlike owning a car, when you buy insurance for a financed car, your lienholder needs to be added as a named insured (remember, the lienholder owns at least some of your vehicle until you’ve paid off your loan). But similar to buying car insurance for any car, these are the steps you should take to find the best coverage for the most affordable price:

  1. Compare multiple quotes: You can find the coverage you need at a price you can afford by comparing quotes from multiple companies. You can either do this by visiting each insurance company’s website and getting quotes one-by-one or by having an expert at Policygenius find the best deal for you

  2. Look for discounts: Most major insurance companies offer discounts for things like bundling multiple policies, having a clean driving record, and staying claims free. You can find out which discounts are available on carrier websites or through an independent expert

  3. Choose your coverage limits: When you get quotes, most insurance companies will present a basic option with the lowest coverage limits, a standard option with average coverage limits, and a premium option with the highest coverage limits. We recommend getting more than your state’s minimum so you’re fully protected in an accident, but the highest tier isn’t always necessary for every driver

  4. Adjust your deductibles: Similar to your coverage limits, you must set deductibles for comprehensive and collision insurance. Deductibles for comp and collision are usually set to $500 or $1,000, meaning this is how much you’ll pay out of pocket if you need coverage. The higher your deductible is, the less you’ll pay in premiums, so that’s one way to save, but it can cost you more once you actually need to use that coverage

Frequently Asked Questions

Does auto insurance go down once a car is paid?

Your auto insurance doesn’t automatically go down once you’ve paid off your car, but you can drop certain coverages in your policy if they aren’t required. Full coverage car insurance is required for any vehicle you’re financing, and is a good idea to keep in case you need vehicle repairs following an accident. But if you can afford to replace your car after a total loss or if your car is worth less than your comprehensive and collision deductibles, then you can drop those supplemental coverages.

How can I save on full coverage insurance?

You can save money on a full coverage car insurance policy by comparing quotes from multiple companies and choosing the best coverage at the cheapest price. You can also raise your deductible, take advantage of discounts, or sign up for a drive-and-save program if your insurer offers one.

Should I consider additional insurance?

All but two states require a minimum amount of liability coverage. Comprehensive and collision coverage are supplemental, but we recommend having them if you want to protect your car in the event of an at-fault accident or unexpected damage. You can also add other optional coverages, like new car replacement coverage to pay to replace your car with a similar make and model if it’s totaled, roadside assistance to cover the cost of towing or fuel delivery, or gap insurance, which covers the difference between how much your car is worth and how much you still owe on it if it’s totaled while you’re still paying off the loan.