Insurance requirements differ by lender and state. Most states require a minimum liability policy for registered vehicles, but a lien holder often requires more coverage. Most lien holders require a full-coverage policy, increased policy limits and a lower deductible. Before you initiate a loan or change your current policy, determine your lien holder's requirements.
Collision Coverage
Expect to provide and maintain collision coverage on your vehicle until your loan is satisfied. A collision policy provides coverage for repairs to your vehicle or its replacement if you're at fault in an accident. A liability policy, required by most states, offers coverage only to other people or property if you're at fault in an accident. Your lien holder also requires that it is listed as your insurance policy's loss-payee. Your lender receives your vehicle's market value payout if your car becomes a total loss. If your insurance payout exceeds the loan amount, you'll receive money back. If you leased the vehicle, the leasing bank keeps the profit.
Increased Limits and Lower Deductibles
Lenders also require increased limits and lower deductibles in addition to collision coverage. A state required liability policy requires a minimum amount of bodily injury and property damage coverage, but your lender likely requires more. The exact amount of coverage required for a borrower's policy differs by lender. In addition to increased limits, expect to choose a lower deductible, or the amount you can expect to pay for repairs yourself if you have an at-fault accident. Both increased limits and a lower deductible increase the cost of an insurance policy.
Gap Insurance
Your lender may also require you to purchase gap insurance coverage. Gap insurance isn't actually an insurance policy and must be purchased when you first initiate your loan. Gap insurance covers the gap between your vehicle's market value and its loan amount. Insurance companies do not pay off your total loan if the vehicle's value is more than you owe. Gap insurance takes care of the rest of your loan's balance so you don't have to. Expect costs to range between $100 and $600, which is a one-time charge.
Your Contract and Insurance Reporting
Additional insurance requirements are explained in your loan contract. Review which penalties exist if your insurance coverage lapses or cancels during your loan period. Some lenders may repossess a vehicle if an insurance policy isn't consistently maintained. Or your lender may add an expensive insurance policy to your car loan, which increases your car payment. Your insurance company electronically notifies your lender and your state motor vehicle office if your policy cancels or lapses. If this happens, your lender can act as stated in your loan contract. Your state only requires that you carry its minimum coverage. If you don't, you may face fines or driver's license suspension if you don't return your license plates.
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