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Liability vs. Full Coverage: Which Auto Insurance Do You Need?
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If you’re looking to save every penny you can on auto insurance, you may be thinking about dropping full coverage and keeping only liability insurance.
In this article, we’ll explain the difference between liability and full coverage. And we’ll take a look at when you might consider dropping full coverage to save on your monthly insurance premium.
Here’s What You Need to Know About Liability vs. Full Coverage
When to drop full coverage and keep just liability is a question a lot of people ask. But first, let’s take a look at what each kind of insurance coverage is and what’s offered.
What Is Liability Insurance?
Liability insurance covers those instances in which you’re the responsible party for an accident. It’s comprised of two types of coverage:
- Bodily injury liability
- Property damage liability
The first covers medical expenses if you injure someone with your vehicle. The second covers costs if you damage someone else’s vehicle or property while you’re behind the wheel.
Each state has a required minimum of liability insurance you must carry, often called the state minimum. You can see your state’s minimum here.
But keep this in mind: State minimums are generally enough to protect you only if you have very few financial assets. For example, maybe you don’t own a home and you have no investments or savings. Then for you, just having state minimum liability coverage might make sense.
For everyone else, you’ll want additional coverage!
What Is Full Coverage?
Full coverage is comprised of two types of coverage:
- Collision insurance
- Comprehensive insurance
Collision insurance is just what its name suggests: It protects you when you’re behind the wheel and cause damage through a collision with another vehicle.
Comprehensive insurance protects you if your vehicle is damaged when you’re not driving it. For example, a tree could fall on your car while it’s parked, or someone could steal your ride out of your driveway. That’s why it’s called “comprehensive.”
Money expert Clark Howard says the value of your vehicle often drives the decision of whether or not you want full coverage.
“If you own a vehicle that’s still worth a significant amount of money, you absolutely want comprehensive coverage,” Clark says.
When Should You Drop Full Coverage on Your Car?
When to drop comprehensive and collision coverage on your vehicle and just keep liability insurance depends largely on the age of your vehicle.
“When cars get about 8 years old or older, that’s the time to start looking at the math for the collision and comprehensive,” Clark says. “At some point, it becomes wiser to just become your own insurance company.”
The general rule is: If the cost of comprehensive and collision exceeds 10% of your vehicle’s value, that’s the time to dump it and just have liability coverage. You can determine your vehicle’s value at Edmunds.com, KBB.com or NADA.com.
Let’s say you have a 10-year-old vehicle that’s worth only $4,000. The minute that you’re paying north of $400 annually — that’s 10% of $4,000 — for collision and comprehensive, it no longer makes financial sense.
One notable exception to this rule: If there’s no way you could financially cover the loss of your vehicle, forget the math and keep paying for collision and comprehensive.
If you have an older vehicle, it often doesn’t make sense to carry full coverage on it. That’s because, if you have an accident, the car has so little value that you’re not going to get a big, fat check to replace it. Depending on the vehicle’s age and condition, you may be lucky to get a few hundred or even a thousand dollars.
Of course, there’s an exception to every rule. Let’s say you remove your collision and comprehensive and just a few weeks later you total your car.
“In that scenario, my advice would prove to be rotten, because you’ll be liable for the expenses on your own,” Clark says. “Statistically it’s unlikely, but it happens.”
You can read the full article here.