Beyond your state's required liability policy, your lender may require you to keep a full-coverage insurance policy on your car throughout the entire period of its loan. A full-coverage insurance policy is the most expensive available, but will pay your lender for the car's market value in the event of a loss, possibly paying off your entire loan.
Full-Coverage Insurance
A full-coverage insurance policy is often required by lenders. This insurance policy covers damage to your vehicle even in accidents that are your fault. Minimum liability policies, the coverage required in most states, only covers damage to other people or property, but not any damages to your vehicle. Banks require this policy because it ensures the loan, or most of it, will be paid off in the event of a loss. The policy pays for the market value of your vehicle.
Insurance Considerations
Check with your lender to find out if requires higher limits and deductibles than your state's minimums. Most banks do not allow more than a $500 deductible and require extra coverage for bodily injury and property damage limits. Some insurance companies allow deductibles over $1,000. Raising your limits and lowering your deductible does increase your policy cost, but also protects your vehicle and your finances in the event of an accident. Finding out the coverage your lender requires also allows you to receive an accurate policy quote.
Gap Insurance
Gap (guaranteed automobile protection) insurance is not required by all lenders, but you should consider purchasing it if you're borrowing more than the vehicle's market value. Gap insurance pays the difference between the car's market value and your loan amount. Without it, you would have to pay any balance due if there is a balance left after your insurance payment. If you're leasing a vehicle, this coverage is most likely required. Ask your dealer, insurance agent or lender for pricing information if you're borrowing more than the vehicle's market value.
Lack of Coverage
If your bank requires a full-coverage policy during the term of your loan and you let your policy lapse or cancel it during the loan period, you are likely to face financial repercussions. The bank may enforce an expensive full-coverage policy and charge your loan account. A bank-enforced insurance policy is more expensive than one you can purchase on your own. You can expect a bill for a higher car payment, which reflects the cost of your new loan amount. You will have to prove you purchased another policy to cancel the extra loan amount, but may end up having to pay extra for the time you did not maintain coverage.
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