When you’re buying a car insurance policy, it’s easy to get caught up in everyone else’s advice. Some will tell you that full coverage is the only option, while others claim anything above the minimum liability requirement is a scam.
Ultimately, it’s up to you to choose between full coverage and liability only– or something in-between. Like many other decisions in car ownership, it all comes down to your vehicle, your finances, and your tolerance for risk.
Note: These tips should not be considered official insurance guidance. Please consult an insurance professional or broker when making decisions regarding insurance.
What Is Liability-Only Insurance?
A liability-only insurance policy only covers damages to another party due to an accident you caused. In most states, this is the bare minimum coverage you’re legally allowed to carry.
Liability insurance typically is made up of two components:
- Bodily Injury Liability: Helps pay for the other party’s medical bills, lost wages, and pain and suffering if they are injured in an accident you caused.
- Property Damage Liability: Helps pay for repairs to the other party’s vehicle or property that you damaged.
It’s also important to recognize what this policy doesn’t cover. Liability-only insurance does nothing to pay for repairs to your own car or your own medical bills after an at-fault accident. That means that you’ll need to cover any damages you incur out of pocket.
What Is “Full Coverage” Car Insurance?
Although you may hear the term thrown around, “full coverage” isn’t actually a specific type of policy. However, it’s usually meant to refer to a policy that includes required coverage, as well as comprehensive and collision.
- Collision Coverage: This pays to repair or replace your car if it’s damaged in a collision with another vehicle or object.
- Comprehensive Coverage: Also known as “other than collision” coverage, this pays to repair damage your car incurs from non-collision events. This includes theft, vandalism, fire, falling objects, and storm damage from things like hail or flooding.
Essentially, while liability covers the other party, collision and comprehensive cover your vehicle.
Related: What Is Full Coverage Car Insurance?
How to Decide Which Coverage Is Right for You
Choosing between these two options feels like a balancing act between cost and protection. Based on national averages, a full coverage policy can cost nearly three times as much as a state-minimum liability policy. To find your balance, ask yourself these three questions.
1. What Is Your Car Worth?
The value of your car is the biggest factor in this decision. If you drive an older car with a low market value, paying for full coverage might not be cost-effective. Insurers will only pay out the actual cash value (ACV) of your car, which is its value right before the accident, accounting for depreciation.
A helpful guideline is the 10 percent rule. If the annual cost of your full coverage premium is more than 10 percent of your car’s ACV, it might be time to consider dropping down to liability only. For example, if your car is worth $4,000 and your full coverage costs $500 per year, that’s 12.5 percent– making it a potentially smart move to switch.
2. Do You Have a Loan or a Lease?
This question might make the decision for you. If you are financing or leasing your vehicle, the lender or leasing company will almost certainly require you to carry full coverage. They are the legal owners of the car until you pay it off, and they need to protect their investment.
If you drop collision and comprehensive coverage while you still owe money, you could be in violation of your loan agreement. Depending on the terms of your agreement, this can have major consequences, including repossession or force-placed insurance.
3. Could You Afford to Replace Your Car Tomorrow?
Be honest with your financial situation. If your car were totaled in an at-fault accident tomorrow, would you have enough cash on hand to repair or replace it without causing major financial hardship?
If the answer is no, you may want to opt for full coverage– and even new car replacement. The higher premium is the price you pay for the security of knowing you won’t have to drain your savings or take on new debt to get back on the road. If you have a healthy emergency fund and could comfortably absorb the loss, then a liability-only policy might be a calculated risk you’re willing to take.
The Smartest Choice Is an Informed One
There’s no single right answer in the full coverage vs. liability debate. A teenage driver with a loan on a new SUV has vastly different needs than a retiree who owns a 15-year-old sedan outright.
By evaluating your car’s value, your loan status, and your personal financial health, you can move beyond guessing and make a confident decision. The key is to find the level of protection that lets you drive knowing you’re prepared for whatever happens next.
To save time on your insurance shopping journey, check out our free comparison tool to get quicker quotes from a variety of insurers.
