Question: Do you have to carry full coverage on a financed vehicle if it’s not being used and is no longer registered?
Answer: Your state won’t require that you keep auto insurance on a car that isn’t registered or driven, but because your car is financed, your lien holder will require you to keep your “full coverage” auto insurance active.
State auto insurance requirements are there to protect people that you could damage while operating your vehicle. Bodily injury liability pays for injuries others may sustain in a car crash that was your fault and property damage liability for the property of others you may harm in an auto accident.
Collision and comprehensive, however, cover your car if it is damaged or declared a total loss. Your lender isn’t concerned as much about others being damaged as it is with the condition of its investment, the car.
Your loan documents will state what insurance coverage you need to carry on your vehicle. You can check with your lender about whether you can carry less coverage or take it off completely if you are no longer using your vehicle -- but typically the answer is no.
A lender’s mandate for insurance for the life of the loan assures that it won’t be left unable to recover the loan balance if the vehicle is destroyed or stolent (though if you owe more than the vehicle is worth you may also need gap insurance to pay off the full loan balance).
And I’ll warn you now, there are some serious consequences if you cancel coverage and your lender finds out.
Your lender should be listed as the lien holder, and additional insured, on your car insurance policy and be notified if you change your coverage levels or cancel your coverage altogether. If they find you no longer carry the coverages they require you to keep on the car, your lender will take out force-placed insurance for the vehicle.
This forced insurance policy (sometimes also known as collateral protection insurance or CPI)protects the lender’s asset if it gets damaged or destroyed. Some notables about force-placed insurance:
- The lender is protecting its investment against loss, not you.
- The cost of the force-placed insurance will be passed onto you -- and it’s not cheap. You now have a lapse in auto insurance coverage, so you become a higher risk. Expect to pay double or more than your standard auto insurance policy.
- The charge is typically added onto your loan payment, so it will be subject to interest.
- You can avoid force-placed insurance by continuously carrying the auto insurance coverages mandated by your lender with your own auto insurer.
- To remove forced-place insurance, you will need to obtain a new car insurance policy, with the required coverages, for the vehicle and then get a copy of the policy to your lender.
Instead of ending up in this situation, review your policy coverages to see if there are ways to cut costs. See if there are limits you can lower, extra coverages you can drop (such as rental reimbursement), or deductibles you can raise to lower the cost of your auto insurance premium, though a $500 maximum deductible may be mandated by your lender. (See “Will higher deductibles save you money?)
If you won't be driving the car, you can ask about low-mileage discounts or pay-as-you-drive coverage such as Progressive's Snapshot.
If you can’t save with your current insurance provider, shop around. Comparison shopping can allow you to save you hundreds, if not thousands, on your car insurance policy. Paying less can help ease the pain of paying for auto insurance on a car you no longer use. (See “12 ways to double-check your savings”)