Automobile insurance in the U.S. consists of three components: liability, collision and comprehensive insurance. While many drivers carry all three, they’re only required to law in most states to carry liability insurance. Collision and comprehensive insurance coverage are generally available as a package and often cost far more than liability coverage alone. There are circumstances in which you must have comprehensive and collision insurance and others in which it makes more sense to carry only liability insurance.
Liability coverage protects your assets by paying for the costs of medical treatment and property repair caused by accidents for which you’re at least partially at fault. Most states require liability coverage as a condition of registering your car. This ensures that if you’re responsible for an injury or property damage while driving, those injured and those whose property is damaged won’t have to pay out of pocket for medical treatment of property repair.
Comprehensive and Collision Insurance
Collision insurance covers the cost of repairs to your vehicle when it’s damaged in a traffic accident that’s at least partially your fault and comprehensive insurance covers losses caused by other things, such as theft, vandalism or weather damage. These coverages are generally subject to a deductible, an amount paid by the policyholder toward the repair costs. Increasing the amount of the deductible is a common tactic employed to reduce premiums.
When Comprehensive and Collision are Required
If you owe money on your car, your lender requires that you have comprehensive and collision insurance. It’s a part of every car loan, and it’s there to help the lender protect its investment. If you don’t have required insurance, for whatever reason, your lender will purchase it, most likely for many times what it would cost you, and add the cost of the premium to your payment.
Getting by With Just Liability
The only time you really have a choice whether or not to carry comprehensive and collision insurance, then, is when there are no liens on your car. Dropping the coverage may save you a significant amount of money, but it may not be the best approach from an economic standpoint. Some experts suggest that if the cost of repairing your car would take more than half your emergency fund, you should continue to carry the comprehensive and collision coverage. Others advise you to drop the coverage if your car’s market value is less than 10 times one year’s premium. Keeping these formulas in mind, your decision should also take your car and your own financial situation into account. For instance, your ability to deal with the cost of replacing your car if it’s stolen should be an important element of your decision, as well as your ability to absorb the cost of repairing your car after a collision or vandalism.
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