When Should You Drop Full Coverage Auto Insurance To Just Liability?

by Ryan Guina

Auto insurance is a basic requirement for car owners. It protects you, other drivers, and lenders who make it possible for people to get a car loan. But just because it is a requirement doesn’t mean you should overpay or get more insurance than you need. The goal is to find the sweet spot where you are paying the minimum you can for the protection you need.

In addition to shopping for lower auto insurance rates, you can save money on auto insurance by changing your coverage levels, such as your deductible, coverage amounts, or by dropping full coverage in lieu of liability only coverage, which is often the minimum coverage required by states.

When to Drop Full Coverage Auto Insurance for Liability Only

There are some rules of thumb regarding dropping full coverage. But it’s usually a great idea to work through your specific situation, run the numbers, and compare insurance plans to make sure you are making the right decision for your situation.

It’s also a good idea to review your situation each year, as auto insurance is something that is very easy to put on auto-pilot. You may find that one day your once brand new car is now closing in on 10 years and 100,000 miles, and still has full coverage (probably not necessary at that point!).

We will cover some rules of thumb further down the page to show when it makes sense to drop full coverage car insurance and just get liability coverage. You still want to make sure you have enough coverage for uninsured & underinsured motorists, property damage, personal injury protection, etc. Those coverage levels are separate from the decision to have comprehensive & collision protection vs. only having liability coverage.

Defining Full Coverage and Liability Auto Insurance

drop full auto coverage for liability onlyLiability Auto insurance. Liability coverage only covers damage to other people or property that is caused by you. For example, if you hit another vehicle, your insurance will cover the damage to the other vehicle (up to the limits of your policy), but it won’t cover damages to you or your vehicle.  Liability insurance is the basic level of insurance and is required by most states.

Full Coverage Car Insurance. Full coverage auto insurance gives you protection if your vehicle is damaged or totaled. It covers your vehicle for both collision and comprehensive damage. For example, if you collide with another vehicle or object on the road, and for comprehensive issues such as if your car was robbed or vandalized, or if damage was caused by weather. Some policies also include coverage for medical bills or even life insurance.

Full coverage may be a requirement. Most lenders require you to maintain full coverage insurance if there is an outstanding loan on the vehicle – this covers the auto lender’s interests. After all, what incentive is there to pay off a totaled vehicle?

When You Can Drop Full Coverage Car Insurance

You can usually drop full coverage insurance if you have a clear title on the vehicle. Any liens on the vehicle probably include a provision that requires full coverage auto insurance.

But just because you can drop full coverage doesn’t mean it is necessarily a good idea. The key here is balance between risk tolerance and affordability. You don’t want to have more coverage than you need because it is essentially wasting money. You also don’t want to have too little insurance because if something should happen to your vehicle that you can not afford to fix, you will be out of luck.

For example, let’s say you buy a brand new, $30,000 car with cash. Could you afford to replace that car with cash if you were at fault in an accident and didn’t have full coverage? Maybe. But is it worth saving a couple hundred dollars a year on insurance to take that risk? Probably not.

At its core, auto insurance is the transfer of risk. If you can’t afford to replace your car with cash, it’s probably a good idea to keep full coverage on the car.

Comparing Full Coverage to Liability

There are times when it makes sense to drop full insurance coverage and only go with basic liability coverage on your vehicle. But there are no clear rules for deciding when to drop full coverage – basically it comes down to how much risk you are willing to take. To determine your needs, look at the following information:

  • Vehicle value and replacement cost
  • Cost of full coverage compared to liability only
  • Cost of deductible
  • Amount of money in your emergency fund

Playing with the numbers. If your car is worth $10,000, you pay $500 a year for full coverage, and you have a $1,000 deductible, chances are good that full coverage is worth it. But it becomes a different story on less expensive vehicles.

The 10% rule of thumb. If the annual cost of your full coverage insurance is more than 10% of the replacement value you would receive from your insurance company, then it may be a good idea to drop full coverage. For example, let’s say your car is worth $4,000, and you have a $1000 deductible. After paying your deductible, the most you would net from your insurance company would be $3,000. If your insurance premiums for full coverage are more than $300 a year, then it may be a good idea to drop the full coverage and go with liability only. You should be able to save a fair amount of money on your premiums each month, which you should probably put toward an emergency fund to cover any damages or repairs which you may need for your vehicle, or toward a new car fund.

When Not to Drop Full Coverage Auto Insurance

The 10% rule isn’t a hard and fast rule. You shouldn’t drop full coverage if you don’t have an emergency fund or savings that can handle replacing or repairing your car if an accident occurs. You also shouldn’t drop full coverage if you still owe money on your vehicle, or if your vehicle would cost more to replace than you can afford.

Don’t drop full coverage just because you can. Some people will drop full coverage to limited coverage as soon as they pay off the vehicle. Typically, they will base this decision on their driving track record and assume nothing major will happen that they can’t compensate for out of their own pockets. Accidents are by definition, unpredictable. Anything can happen to anyone at any time.

Making a Decision

If you are on the fence about dropping full coverage because of cost, you should compare auto insurance rates with competitive insurance carriers. Every company uses different criteria to determine rates, and you may be able to find full coverage at a less expensive rate from another carrier. You should also review your current policy and drop unnecessary options.

Here are some auto insurance providers in your area:

Published or updated February 10, 2017.
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{ 9 comments… read them below or add one }

1 The College Investor

If you are looking to save money, you should really call other insurers. The market for auto insurance is so fierce right now that you can probably cut your tate by at least 30% just by switching carriers.


2 Jim

Paying more than $300 per year insurance premium, is that in the middle of nowhere? I pay $500 for 6 months of liability only in a metro area with 1.2 million people. I’ve called multiple insurance companies and agents. And the best they can do is usually $20 less than what I’m paying now. My cars only worth $5000. I wish I could make my premium that low.


3 Ryan

Jim, the $300 figure was for illustration purposes only. $400-$600 is probably more realistic. For example, we pay about $800 per year for full coverage on two cars, which are worth about $30,000, combined. We live in a suburban area, and we don’t drive many miles. Rates vary wildly from state to state, and even within regions within a state. They can also be affected by other factors, such as driving record, vehicle model, safety features on the vehicle, number of miles you drive, crime in the area, multi-policy discounts (more than one car or other insurance product with the same insurance company), etc. All things considered, insurance in metro areas is often higher than in rural or suburban areas.


4 Jim

That’s very true. In my case I need to look for other areas to trim my budget.


5 Precious


Question: Aunt has fully coverage on her car that is 14 years old. She was not aware that her insurance company will only cover her car under liability, yet they fail to communate this to her in other words she has been losing money. A couple of months ago she was in a hail storm are had hail damge. Her car blue but value is only 1,500. He damges are over 4,000. Should the insurance company cut her a check for $4,000 or total out her car?


6 Ryan Guina

IF the car is only worth $1,500, then the insurance company would likely total it out. However, each policy is different, so your Aunt should contact the company or read through her policy for specific information.


7 Michaela

I am 21 living in a town in Massachusetts. I just got my new premium for the year of $2,865. According to KBB, my car is worth about $5,600. I was considering dropping full coverage, but people are making me nervous, since I’d be the one to hit someone the week after I did it. I will have paid for the car 2 years from now with insurance. What do you think I should do? I’m having a hard time making a decision…if I were to shop around other companies, do you think it would be a significant difference? ($500 or more…)

Also, what about raising deductible from $500 to $1000? I always have more than that in my savings, but people say there are other risks to this?


8 Ruth

One thing to take into consideration is your geographic area. For example, in Michigan, you have a 1 in 85 chance of hitting a deer. In West Virginia, you have a 1 in 41 chance. In Hawaii, your chances of hitting a deer are 1 in 18,955.

I live in Michigan, so it makes sense to always maintain comprehensive coverage, regardless of the value of the vehicle. We’ve had 4 deer crashes in the last 8 years including just one just a few weeks ago. The deer totaled out our van on this one.
So having the comprehensive coverage has certainly been worthwhile.

Also, we live in Michigan which is a no-fault state. That means that it doesn’t matter who’s at fault, the other driver’s insurance won’t cover your vehicle. Other than limited recourse of recovering your deductible from the at fault party, you’re pretty much out of luck, if someone else runs into you.


9 SundayJ

I am trying to decide if I should keep comp & collision on my BMW X3 that is a 2003 or save $404 dollars a year by going to Liability only on the car. I live in a small town in Oregon. Vehicle is worth $5,000. What is your suggestion?


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