If you want to reduce your insurance costs, you may be considering changing your car insurance policy to a liability-only plan. But before you make any adjustments, make sure you know the ins and outs of liability vs. full coverage auto insurance.

Liability insurance doesn’t cover as many possible incidents as full coverage auto insurance does. And although full coverage car insurance can be expensive, you also don’t want to have such little coverage that your financial health is at risk if you ever get in a car crash. State-required insurance minimums often aren’t enough for full protection.

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Liability vs. full coverage car insurance

Owning a vehicle is more expensive than it was just a year or two ago. According to AAA, the average cost of new vehicle ownership — including gas, maintenance, insurance, and finance charges — has risen to $9,666 per year.

If something ever happens to that pricey vehicle (or the people inside it), you’ll need car insurance to cover the costs. Auto insurance companies offer both liability and full-coverage insurance plans, but they cover very different things.

How does liability car insurance work?

In most states, drivers are required to have some level of liability insurance protection. Minimum coverage amounts vary by state, but these policies cover damages or injuries you may cause to others in an accident.

There are two parts to liability coverage:

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• Bodily injury: This pays for the other party’s medical treatment and expenses if you injure them in a car accident.

• Property damage: This pays to repair or replace property damaged in an accident you caused, such as a fence, car, or building. (This does not include damages to your own vehicle.)

Keep in mind that state minimums for liability insurance are relatively low. If the property damages or injuries from an accident exceed the state’s minimum limits, you’re responsible for any additional costs. In general, you should get the most liability coverage you can reasonably afford.

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How does full coverage car insurance work?

Although people often talk about purchasing full coverage insurance, “full coverage” isn’t a standardized term. Full coverage insurance typically means a policy that combines liability protection with comprehensive and collision coverage, but the details vary by insurance company.

• Liability: As with liability-only policies, liability protection covers damages or injuries to another person in an accident.

• Collision insurance: Collision protection pays for damages to your car resulting from an accident. It covers repairs, or, if the car is declared a total loss, it pays you your car’s actual cash value.

• Comprehensive insurance: This insurance pays for damages to your car from something other than collisions, such as storms, vandalism, or theft.

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Because full coverage insurance combines three types of coverage, it’s more expensive than liability-only policies. The average cost of a policy that includes liability, collision and comprehensive coverage was $1,203.65 per year in 2019, according to an NAIC report. That’s almost twice as much as the cost for a liability-only policy.

Unlike liability coverage, collision and comprehensive policies also usually have deductibles, which can range anywhere from $100 to $2,500. If you are in an accident or your car is damaged, you must pay the deductible before your insurance will start paying for any damages or repairs.

Collision and comprehensive protection isn’t required by law. However, your lender may require you to have full coverage insurance if you have an auto loan or lease. If you’re on the road a lot, you might also want to consider adding additional coverage for uninsured/underinsured motorists or roadside assistance.

5 important differences between liability and full coverage car insurance

If you’re still deciding between liability coverage and full coverage auto insurance, keep these five key differences in mind:

1. Coverage

Liability protection only provides coverage for damages and injuries you cause to another person. It doesn’t pay for repairs to your own vehicle or your own medical bills. By contrast, full coverage insurance provides liability protection as well as coverage for repairs to your vehicle and medical treatments if you’re injured.

2. Coverage limits

With liability insurance, you can choose how much coverage you want as long as you meet your state’s minimum requirements. For example, New Jersey requires drivers to have limits of at least $15,000 worth of personal injury protection (PIP) per accident as well as $5,000 worth of property damage coverage.

However, many experts recommend purchasing much higher coverage amounts than the state requires, such as $100,000 to $300,000, to ensure you’re covered in cases of serious injuries or lawsuits.

For full coverage policies, policy limits vary based on the type of plan you choose, but the limits are generally based on the actual cash value of your car.

3. Cost

Full coverage insurance is significantly more expensive than liability-only policies. Full coverage policies that include liability, comprehensive, and collision insurance cost almost double what liability-only policies cost.

Exact premium prices will vary by person. Factors that affect car insurance rates include vehicle year, make and model, your age, typical mileage and location.

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4. Deductible

Deductibles only apply to insurance that covers damage to your own property. Full coverage policies with comprehensive and collision protection will have deductibles, but liability-only policies will not. Deductibles can range from $100 to $2,500.

5. Law

Liability auto insurance is required in nearly every state. There are only two states in which liability coverage isn’t required by law:

• New Hampshire: In New Hampshire, drivers don’t need auto insurance, but they must be able to demonstrate that they have sufficient funds to meet the state’s motor vehicle responsibility requirements.

• Virginia: Drivers in Virginia can forgo car insurance if they pay a $500 fee to the state. But you take on huge financial risk if you’re ever involved in an accident.

State laws don’t require drivers to have collision or comprehensive protection, but your lender may require you to have a full coverage policy if you lease a car or take out an auto loan.

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Which car insurance should you choose?

If you’re trying to save money on car insurance and are deciding whether liability-only or full coverage insurance makes sense, ask yourself these questions:

• What is the value of your vehicle? If your vehicle would cost a lot of money to repair or replace, a liability-only policy is unlikely to provide enough coverage. You will probably need full coverage that includes collision and comprehensive protection.

• Is your car leased or financed? If you took out a loan to purchase your car, or are leasing it from a dealer, the lender may require you to have full coverage insurance.

• Do you have substantial savings? Drivers that have a lot of money saved may be able to skip full coverage policies. If you’re financially comfortable, you could self-insure and pay for all of your repairs or medical bills yourself in case of an accident — but it would still be very expensive.

• What would you do if your car was unusable? Liability coverage only pays for damages and injuries to another person. If your car got damaged and you couldn’t afford to repair or replace it yourself, you could lose access to your vehicle entirely.

FAQs

How much liability insurance do I need?

Minimum liability insurance limits vary by state. However, you should generally get more coverage than the state minimum requires. If you cause injuries or damages beyond your policy’s limits, you’ll have to cover the remaining cost entirely out of pocket.

When deciding how much liability insurance to get, purchase as much as you can comfortably afford. In general, experts recommend a minimum of $100,000 worth of bodily injury protection per person and $300,000 per accident.

If you have substantial assets that could be at risk in a lawsuit, such as investment accounts or real estate, you may need even more coverage or an umbrella liability policy.

At what point is full coverage not worth it?

Full coverage policies that include liability, collision, and comprehensive coverage may not be worth the additional cost in the following scenarios:

What is liability insurance?

Liability insurance is the type of auto insurance required in most states. It’s made up of two parts: bodily injury liability and property damage liability. Liability coverage pays for damage and injuries to another person or property you could cause in an accident. It doesn’t cover your own injuries or damages.

Bottom line

If you have a newer car or don’t have a lot of money in savings, then full coverage insurance is probably a good idea. If you have an older car and could afford to pay for repairs or replacement out of pocket, then you might be able to get away with liability-only insurance coverage.

Most people should get more than the minimum amount of liability insurance because the cost of a car accident could easily exceed those low limits. And if you want extra peace of mind, then full coverage insurance might be worth the extra cost to you.

Regardless of which type of insurance you choose, make sure to shop around and compare prices from different insurers. If you’re researching how to switch car insurance companies, the process is pretty easy. Get started by checking out our picks for the best car insurance companies.

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This article Liability vs. Full Coverage Auto Insurance: Which is Right for You? originally appeared on FinanceBuzz.