Most people know the difference between these two forms of auto insurance. Full coverage pays for the property damage and personal injuries that all parties sustain in a car crash up to the policy limits; limited liability coverage does not compensate the vehicle owners for these losses.
Sometimes, the choice between the two types of policies is out of the owner’s hands. To protect their interests, most lenders require full coverage insurance for as long as the owner makes payments on the vehicle. But in other situations, choosing the right auto insurance is a difficult decision.
Car accidents can happen anywhere at any time, no matter how carefully you drive. Nevertheless, the more miles the owner puts on the vehicle, the higher the likelihood of a collision. If you frequently drive in unfamiliar areas and/or at night, the risk is even higher. High risk weighs in favor of full coverage insurance, subject to the cost discussion below.
Non-driving habits are important as well. If there is a child, roommate, friend, or other person who uses your vehicle more than about once a week, full coverage may be a good idea. In most jurisdictions, vehicle owners are responsible for the damages these drivers negligently cause.
Many people drop full coverage insurance as soon as their vehicles are paid off and there’s no longer a lender requirement. In most cases, that may not be a good idea. Vehicles that are only four or five years old usually still have much of their monetary value, so replacing them would be difficult if they are totaled in accidents.
By the time the vehicle is eight or nine years old, it probably has essentially no value, even if it is still in excellent condition. If the numbers make sense, dropping down to limited liability coverage might be a good idea at this point.
In auto insurance matters, cost is probably the most important consideration. Begin by looking at the four numbers that matter most:
- Vehicle replacement cost,
- Premium comparison between the types of insurance,
- Deductible costs, and
- Amount of money in your savings account.
Most owners use the 10 percent rule to evaluate the numbers. If the full coverage premium exceeds 10 percent of the vehicle replacement cost, seriously consider dropping full coverage. If the vehicle is worth $4,000 and your policy has a $1,000 deductible, $3,000 is the most the policy would pay in an accident. If full coverage premiums are more than $300 a year, full coverage insurance is probably not cost effective. Switching to limited liability insurance should lower the premium significantly. Those savings can go to an emergency vehicle replacement fund.
Insurance is not just one or the other. There are some ways to lower full coverage premiums without losing all the benefits. Increasing the deductible usually lowers the premium. Just be sure the deductible you select is something you can afford to pay.
Owners must have auto insurance to drive, and they must also make smart choices about the type of insurance.