When Should You Buy "Liability Only" Insurance?
Many states require drivers to have auto insurance of some kind, but the coverage and cost to the driver can vary greatly. Some drivers might consider going with the bare minimum and opt for "liability only" insurance, which only covers damage to the other driver's property and the other driver's person when you're at fault.
However, some confusion seems to exist as to when "liability only" insurance is acceptable, and when you need a more comprehensive plan. In other words, when should you opt to cover the other driver's expenses, but not your own?
Your Car is Completely Paid Off
One of the main reasons people switch from comprehensive or collision to liability only insurance is to save money. On average, drivers save $500 a year — cutting their insurance costs by 50% — when they downgrade their insurance policies. That might sound appealing if you have mortgage payments and student loans pulling from your account each month, but don't get too excited if you're still paying off your car.
Legally, you cannot drop your full coverage unless your vehicle is fully paid off. Furthermore, many lenders won't allow it. Opting for this insurance while paying off a loan could mean that your car will end up getting repossessed.
Your Car's Value is Low
Put nicely, liability insurance isn't for shiny, new cars. If you cause an accident, your insurance company might decide that the cost of fixing the car outweighs what the car is worth, and opt out of covering repairs. When your car is older or has a low residual value, it's easier to reach the repair-cost-versus-value threshold.Let's say a car gets into an accident, and it needs and new headlight and some expensive body work (also, the frame possibly is bent). The driver of a car that's worth $9,000 would want comprehensive coverage as this $1,000 repair is almost 1/10 the value of the car.
Conversely, the driver of an older model that's only worth $1,200 might realize it's worth it to buy a new car entirely, instead of paying almost the entire value of the car to make it driveable again. This second driver would benefit from liability only insurance. Your State Requires Nothing Else
There are two other forms of protection that some states require drivers to have: uninsured motorist and personal injury protection (PIP). Uninsured motorist protectionkeeps you safe in the event that a driver without insurance coverage causes an accident; it also covers you in the event of a hit and run.Your Car's Value is Low
PIP covers medical expenses and lost wages regardless of who caused the accident. It is often referred to as "no-fault" coverage, because it helps both parties no matter who is to blame. PIP is required in 13 states, so find out whether you need it in yours. If those two aren't required by law, a liability only policy may be for you.
You Have Enough Money to Buy a Replacement Vehicle
The general rule of thumb is that, if you could walk to the lot and buy a replacement car in cash (and still have a chunk of money in your checking or savings accounts), then you can comfortably switch to liability only. Your insurance will ensure the driver of the other car is taken care of, and you will go and pay for a new car out of pocket. If causing an accident that damages your car beyond repair would force you to take the bus for several months, though, switching to a cheaper insurance policy is not your best option.
You Have No Other Options
Many drivers miss out when they opt for liability only insurance over collision or comprehensive insurance. Comprehensive insurance covers other events that could damage your car. Even if you have a clean driving record and have never been in an accident, a storm could come through and destroy your vehicle with flooding or a fallen tree branch.
Many insurers recommend switching to liability only as a last resort. Instead, talk to your insurance company about ways you can lower your premium, or shop around for lower options.
Liability only isn't a cheap alternative to comprehensive coverage, and should mostly be used if you're able to replace your vehicle and any repair costs are above the value of the car.