Full Coverage vs. Liability Only: When to Drop Collision

Full coverage vs. liability only: full coverage is not a product, it is shorthand for liability plus collision plus comprehensive. Liability is legally required and protects other people. Collision and comprehensive protect your own car and are optional unless a lender requires them. Dropping them makes sense when their annual premium approaches a tenth of what the car is worth and you could replace it from savings. "Full coverage" is not something you can buy. There is no such product. It is shorthand for liability plus collision plus comprehensive, and the decision people actually face is whether the last two are still worth paying for.

Full coverage vs. liability only: what each part does#

Liability pays for the other person's injuries and property when you cause an accident. Required by law in nearly every state. Not optional, and not what this article is about.

Collision pays to repair or replace your car when it hits something or is hit, regardless of fault. Subject to a deductible.

Comprehensive pays for everything that is not a collision: theft, fire, flood, hail, vandalism, falling objects, and animal strikes. Usually a lower deductible.

Collision and comprehensive protect an asset. Once the asset is not worth much, protecting it stops making sense.

When does dropping collision save money?#

Both coverages pay actual cash value: the car's market value immediately before the loss, minus your deductible. Not what you paid, not what a replacement costs.

Take a 2012 sedan with 165,000 miles, worth about $4,200.

You are paying $640 a year to protect a maximum of $3,700, and that maximum falls every year as the car depreciates while the premium does not fall as fast.

Over three years you pay $1,920 in premiums. If the car is totalled in year three it is worth maybe $3,000, so you recover $2,500. Across a large number of drivers, that trade favours the insurer, which is exactly how insurance is supposed to work, and exactly why it stops being worth buying once the sum at risk is small enough to self-insure.

What is the better test than the 10% rule?#

Could you replace this car tomorrow, out of savings, without disrupting anything?

If yes, you can self-insure it. Drop the coverage, and put the premium saving somewhere it accumulates.

If no (if losing the car means losing your commute, or means a subprime auto loan, or means an argument about which bill goes unpaid) keep the coverage even when the 10% rule says otherwise. The rule optimises expected value. You are managing a risk you cannot absorb, which is a different problem.

When should you keep collision anyway?#

1. You have a loan or lease. Not a choice. Lenders require both, and if you cancel they will force-place coverage that is dramatically more expensive and protects only their interest in the car, not you.

2. You are underwater on the loan. If you owe more than the car is worth, you need both coverages and gap insurance, which pays the difference in a total loss. Otherwise a written-off car leaves you making payments on a vehicle that no longer exists.

3. The car is genuinely hard to replace. A reliable vehicle that fits your particular needs at your particular budget is not always available at short notice at the price a valuation table suggests.

4. Comprehensive is cheap and your risk is real. These two coverages are separable. In hail country, near flood zones, or in a high-theft area, comprehensive alone often costs a fraction of collision and covers the losses most likely to write the car off. Dropping collision while keeping comprehensive is frequently the right middle answer, and almost nobody is offered it.

What do you actually lose?#

Be clear-eyed about it. Going liability-only means:

• Hit a tree, and you buy the next car.
• Someone hits you and drives off, and you buy the next car, unless your state applies uninsured motorist property damage coverage to hit-and-run.
• A tree falls on it in a storm, and you buy the next car.
• It is stolen, and you buy the next car.

Uninsured motorist coverage does not fill this gap in most states. It handles injuries; property damage from an unidentified driver often is not covered.

Does dropping collision change your liability coverage?#

No, and conflating the two is the most expensive misreading of this decision.

They are separate line items on the same declarations page, priced separately and doing completely different jobs. Collision and comprehensive protect an asset you own, worth at most the value of the car. Liability protects everything else you own from a claim brought by someone you injured, and that has no natural ceiling.

The arithmetic is asymmetric in a way people find counter-intuitive. On a ten-year-old car, dropping collision might save $400 a year and put a maximum of $4,000 at risk. Carrying state-minimum liability instead of 100/300/100 might save $200 a year and put your savings, home equity and a share of future wages at risk. The cheaper saving carries the larger exposure.

So the sensible version of this decision is usually a swap rather than a cut: drop collision on a car you could replace, and put part of the saving into higher liability limits. Both moves are made in the same phone call, and the net premium change is often close to zero while the protection improves substantially.

Two related points. If you carry a loan or lease, this decision is not yours to make: lenders require both coverages, and cancelling triggers force-placed insurance that costs far more and protects only their interest. And if you owe more than the car is worth, you need gap coverage as well, because actual cash value will not clear the loan.

The Insurance Information Institute and NAIC consumer material both set out what each coverage does. Before changing anything, read what every line on your policy buys, and if your renewal jumped without a claim, there are specific reasons for that.

A practical middle path#

The version that actually works#

The real risk in full coverage vs. liability only is not the coverage decision at all. The failure mode is not dropping the coverage. It is dropping the coverage and spending the money.

If you drop $640 a year of collision and comprehensive and set up a $55 monthly transfer into a savings account, in three years you have roughly $2,000 earmarked for the car, which is close to what the insurance would have paid, and it is yours whether or not anything happens.

If you drop it and the money merges into everyday spending, you have not self-insured. You have just gone uninsured, which is a different and worse thing.