One of the most effective ways to save money on your car insurance premiums, in addition to comparing auto insurance quotes, is simply to reduce the amount of coverage you buy. But — and this is a big but — doing so carries risk. If your car is stolen or damaged by anything other than another well-insured driver, guess who gets the bill for your car? That’s right: you.

That’s why one of the most important questions to answer before selecting an auto insurance plan is “Do I need full coverage?” Sometimes the answer will be clear-cut: full coverage will be required; or, conversely, your old beater clearly won’t be worth the cost of the extra insurance.

But in many cases, such as when you have paid the car off and it is just starting to age, getting to the answer will require a little risk assessment and a little math. Take the time to do the calculations, though. It could end up saving you thousands of dollars.

However a quick way to decide if you need full coverage is to assess your car's actual cash value. Then, compare that to the amount you pay a year for comprehensive and collision coverage, which is what comprises full coverage, along with liability insurance. As your car ages and you rack up miles, the value goes down. Comprehensive and collision will only pay out up to the actual cash value of your car. So, if you totaled your car and the payout would be $3,000, and you're paying around $800 a year for comprehensive and collision, it might not be worth it. But if the payout is $15,000, it likely would be.

What is full coverage auto insurance?

Before we go any further, it's important that you understand what full coverage means. So, let's do a quick recap on what, exactly, insurers mean when they use the phrase “full coverage.” A full coverage policy includes liability insurance, as well as the optional coverages of comprehensive and collision.

There are two general categories of auto insurance. The first is liability car insurance, which covers injuries and damages that you cause to other people and to other people’s property. Also referred to as “required insurance,” this is the portion that drivers in every state except New Hampshire are legally required to carry. Our guide on the minimum level of liability insurance required in your state explains this in detail shows how much it typically costs.

The second category of insurance covers damages to your own car that are not covered by someone else’s liability insurance, meaning, generally, that they are either your fault or an act of nature. Also referred to as “optional insurance,” it has two components:

  • Collision insurance covers damage to your car from a crash. This could be an accident that you cause. For instance, you hit another car, flip your vehicle, back into a tree, or mistake the gas pedal for the brake and slam into a building. It could also be an accident caused by another driver who does not have enough liability insurance to cover your repairs.
  • Comprehensive insurance covers losses to your car from incidents other than car crashes, such as floods, fires, hurricanes, falling tree limbs, animal strikes, vandalism and theft.

For more details, read our guide on  full coverage and what it costs.

Do I need full coverage on my car?

“Full coverage” means liability, collision, and comprehensive combined. The only time you absolutely need, as in are required, to have full coverage is when you don’t own the vehicle outright. If you are still making car payments, then the dealer’s finance company or your bank — whoever the lienholder is — will most likely require that you carry full coverage until you have paid off the loan. The lender wants to protect its investment.

Do I need full coverage on a used car?

It doesn’t matter whether you bought the car new or used, or whether you bought from a dealer, a mechanic, or a neighbor over Craigslist — If you are still making car payments then you will most likely be required to carry full coverage.

My car is paid off. What type of insurance do I need?

Once you have made your final car-loan payment, you will not need to carry any more than the minimum amount of liability insurance that’s required in your state. After all, now you are the only one who stands to lose money if your car is damaged.

And dropping comprehensive or collision, or both, could save you hundreds of dollars a year. According to a rate analysis, the average annual rate for collision is $596 and for comprehensive is $192, for a total of $788.

I know a woman in Massachusetts who spoke to her insurance agent and opted to cancel her comprehensive and collision coverage to save money on her premiums. She was already spending a lot every month to insure two teenage drivers. Two weeks later, her car was stolen out of her driveway. The thief took it on a joy ride and totaled it. The thief was caught, but he did not have insurance and has not been able to pay restitution from jail. The car’s owner, in addition to losing her car, was handed the bill for towing and storage fees. Her loss totaled about $14,000. If she had still had comprehensive and collision insurance, her loss would have been only the amount of her deductible.

Should I have full coverage on my car?

When considering dropping insurance coverage, it’s useful to consider your own tolerance for risk. Can you be comfortable knowing that if your car were stolen or vandalized that you could potentially be out the entire value of the car? Can you be comfortable driving knowing that your own car will not be covered if you spin out on ice and crash? Or hit a deer? Or strike another car?

The answers depend in large part on the value of the car, and the cost of the insurance. Most of us would probably be willing to risk losing a $3,000 car if it meant saving $800 a year in premiums. But what about an $8,000 car, with $600 in premiums and a $500 deductible?

When to drop full coverage on your car

Penny Gusner, senior consumer analyst says use this checklist and ask yourself:

  • How old is your car? In general, if it is less than 10 years old, she suggests buying comprehensive and collision. You can see the average costs of each in your state in our guide on when to drop comprehensive and collision coverage.
  • Can you afford to replace or repair your car if it’s damaged or stolen? If this would be a hardship, keep full insurance to prevent a sudden large loss. You can check your vehicle’s current value at the web sites of Kelley Blue Book or NADA.
  • Would you pay to fix your car if it had a major mechanical issue? If a $1,200 repair isn’t worth it because your car is only worth $3,000, then maybe neither is $600 a year in insurance payments.

Another way to decide is to determine if your yearly comprehensive and collision payment equals 10% of your car's actual cash value. If it does, you may want to consider dropping the coverage. Let's say your annual cost is $800, and your car is valued at $5,600. Ten percent of $5,600 is $560. That's more than your yearly $800 premium, so it may not make sense to keep comprehensive and collision.