We get this question quite often from our clients. I’m glad they are asking this because it gives us a chance to review their auto insurance coverages and offer guidance.
First off, paying off your loan doesn’t change the insurance premium. There is no additional charge on the insurance for having a loan on any of your vehicles. But paying off the loan allows you some flexibility in coverage.
Once your loan is canceled, you are no longer required by the bank to carry physical damage coverage on your car. Physical damage is your comprehensive and collision coverage. This part of your policy covers you for theft, fire, glass, collisions, and more. Removing this coverage removes that protection against those perils. It also will save you money.
Here is where we want to have the discussion about removing comprehensive and collision. Remember, your policy will pay up to the book value of your vehicle in the event of a claim. As discussed in a previous blog, you should decide if the reduction in premium is worth the risk of removing physical damage coverage from your car. Please talk this through with your agent.
Letting your agent know that the loan has been settled also helps with any future claim experiences. If your loan has been paid off and the agent hasn’t been notified, the lienholder will still be listed on your policy. If you have a claim, the lienholder will be listed on your claim check. That could be a tangled web trying to resolve that issue. You may need to jump through several hoops to get the check recut in just your name. Letting the agent/company know the loan has been paid off will prevent this from happening.
In summary, our recommendation is to discuss any changes to your coverage with us so we can provide the best solution for your needs.