Is my car insurance cheaper when I own the car?

Paying off a vehicle when it has been leased or financed feels like a milestone.

While owning your vehicle may mean more to you than being a borrower or a lessor, taking that leap to becoming a titleholder does not always affect the cost of your car insurance premiums.

Whether or not your insurance will be cheaper when you own is dependent upon the coverage options and limits that you decide to carry and how you value your vehicle.

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How Listing a Lien Holder Affects Your Car Insurance Policy

When you are borrowing from a bank, lender or another type of financial firm to give you money to pay for a vehicle that you would like to buy, the institution is called the lien holder.

Since you owe money to the bank and must pay back the principal and the interest before the contract ends, you must fulfill your obligations.

One of the obligations is that you must carry a stated amount of insurance coverage on the car and list the institution with an interest in the vehicle as the lien holder or the loss payee.

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Why are borrowers required to list lenders as the loss payee?

Now that you understand what a loss payee is, you might be wondering just why the lender has a contract that requires the borrower to list the lender as the loss payee on an auto insurance policy.

Being a loss payee on car insurance protects the finance company’s interest in the vehicle if it is involved in an accident or in another type of loss.

When a covered auto on a car insurance policy has a listed loss payee, the insurance company is obligated to make all loss payments to this party and not to the policy owner responsible for making premium payments.

This way, the lender knows when there is damage that must be repaired and can arrange repairs to ensure that the borrower is maintaining their vehicle and fulfilling their contractual duties.

The loss payee will also be notified if the policy cancels for any reason, including voluntary cancellations and non-payment.

Lender requirements generally state that the policy provided to the lender must include:

• Policy effective date and expiration date
• Vehicle coverage options and limits
• VIN of the vehicle
• Loss payee clause as stipulated

Does the borrower have any other obligations in terms of car insurance?

Borrowers must do more than just list the finance company as a loss payee when they do not own the vehicle outright.

In addition to listing the finance company, the borrower must carry an adequate amount of coverage to protect the lender’s asset.

The requirements may be different for financed cars and leased cars.

Here is a breakdown of coverage requirements:

Financed Cars:

All borrowers must carry both comprehensive and collision on financed vehicles until the loan is paid off and the lien has been removed from the title.

Many finance companies do not allow high deductibles and will only approve deductibles up to $500.

A lender does not require specific liability limits because they do not have an interest in liability claims.

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Leased Cars:

Requirements for leased cars are a bit more strict.

Not only are you required to carry physical damage for comprehensive and collision claims, you must carry a minimum amount of liability coverage that is higher than the mandatory limits in your state.

Most lease companies will require the borrower to carry $100,000 per person, $300,000 per accident in Bodily Injury and $100,000 per accident in Property Damage.

You may even be required to carry gap coverage, which will pay the difference between the value of the car at the time you leased the car and the value of the car at the time of the loss.

Why Removing a Lien Holder Has No Direct Effect on Premiums

Now that you understand what lien holders, loss payees, and lessors have to do with insurance, you can gain a full understanding as to why paying off your car will not directly affect your premiums.

When you payoff the car and there is no longer a lien holder, there is no longer a need to list a loss payee.

By calling your agent to remove the finance company, the policy will be endorsed and you will get a new policy that no longer has a loss payee clause.

If you file any claims, only you and any other named insured will receive the claims check.

You will not have to go through a lender to receive the check for your vehicle repairs if you do have a loss.

This endorsement makes the claims process more convenient for you but has no financial implications.

When Becoming a Vehicle Owner Has an Indirect Effect on Rates

Becoming the owner of the vehicle can help you reduce your premiums if you are willing to make changes to your coverage.

Once the car is paid off, you are technically not required by law to carry comprehensive and collision.

If you can replace your car on your own or your car holds little value, it might be worth considering removing the unnecessary coverages that are driving your premiums up.

It is not always cheaper to insure a car that you own.

If you would like to price the cost of coverage through various carriers, use an online insurance rate comparison tool.

By entering the car information and your driver information into the system, you can see just how much your coverage will cost you before you make any adjustments or hasty modifications.

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