If you're thinking of saving money by canceling your car insurance policy or allowing it to lapse, you may end up costing yourself a bundle.
If you have an accident while you're uninsured, you could be sued for any physical injuries or property damage you cause, warns Kevin Foley, a New Jersey insurance agent.
"You'll be on your own," he adds. "You won't have protection for all of the things that insurance guards against."
Reasons drivers cancel their car insurance policy
Michael Barry, a spokesman for the nonprofit Insurance Information Institute (III), notes that all states except New Hampshire require drivers to at least have liability coverage. New Hampshire requires uninsured drivers to prove they are able to pay for damage or injuries they cause. Foley says there are several reasons why people typically stop paying for car insurance.
- They forget to pay their bill. Foley says this is the most common reason he hears. Many people set their insurance bills aside and forget to pay them, even after receiving notifications from their carrier by mail.
- They can't afford to maintain their policies. During hard economic times, when layoffs are common, people often have more expenses than they can handle. At that point, some bills simply don't get paid, Foley says. Often it's a matter of choosing between paying your mortgage and your car insurance, he adds. In such cases, most people will pay for shelter first.
- They gamble on not getting caught. Some drivers are risk takers. In order to save money, they keep driving after their policy has lapsed and hope for the best, Foley says.
Driving without car insurance
Even if you’re lucky enough not to have an accident, driving without insurance can cause you big problems. If a police officer stops you for a traffic violation, you likely will receive a citation and your car may be towed away, says Richard Weinblatt, dean of the School of Public and Social Services and the School of Education at Indiana's Ivy Tech Community College. You're not likely to be taken to jail on a first offense, he adds, but you could be fined.
If you're in a car crash while you're uninsured and there’s a court judgment against you, a lien could be attached to your home or other property you own to cover the damage you caused, he says. A lien is a legal claim of ownership that may be lifted when your debt is repaid.
When an uninsured driver borrows a car from an insured driver, generally he or she is protected by the insured driver's policy, says Diana Lee, assistant vice president for policy development [KF3] and research at the Property Casualty Insurers Association of America (PCI). She notes that some states limit the amount of coverage insurers can provide in such situations, however. You can find more information about such restrictions from your state's department of insurance.
Lapse in coverage can lead to higher car insurance premiums
The percentage of uninsured drivers in the U.S. was 13.8 percent in 2009, according to an Insurance Research Council study. In addition to exposing themselves to lawsuits and fines, these drivers may face higher insurance costs if they decide to renew their policies, says Tully Lehman, a spokesman for the Insurance Information Network of California.
Each carrier maintains its own formula for setting rates following a policy lapse. Premiums are based on the insurance underwriter's perception of the risk that each driver represents. People with no gaps in coverage are better insurance risks, Lehman says.
"It will vary from insurer to insurer, but typically if you don't maintain current coverage, you may end up having a strike against you," he says.
Foley says that when you buy insurance again after letting your policy lapse, your premium typically would increase by 15 percent. For example, if your annual premium had been $1,500, it would rise by about $225, he said.
If your rate goes up, it’s up to your insurer to decide how long the higher premiums remain in effect. You typically can earn a lower rate if you continue to pay your premiums on time and maintain a good driving record, without accidents or serious traffic violations, Lehman says.
If your rates are increased, you can shop for a cheaper carrier, but be careful not to focus on price alone. A cheaper policy may offer less coverage. For example, the amount of protection you have against property damage or injuries may be reduced.
People who drop their car insurance have some options, says Nicole Marht Ganley, a spokesperson for the PCI. For example, if you rent a car, you can purchase car insurance from the rental agency. Another option is to borrow a car from a friend who has automobile insurance. As long as you have the owner's permission, his or her car insurance will cover you while you drive, she says.
If you decide to stop driving your car, you can maintain a comprehensive policy that will protect it against such mishaps as fire, theft, windstorms, and vandalism, Foley says. Unlike liability insurance, which pays for damage or injuries you cause to others, comprehensive reimburses you for losses due to something other than a collision with another vehicle. Such a policy typically would cost you about $400 per year, he adds.
If you do this and then decide to return an unused car to the road, your insurer isn't likely to penalize you with higher premiums when you renew your policy, he says.
Accidental car insurance policy lapses
Sometimes policy lapses are the result of poor timing. When you change policies, make sure the new one will take effect before the old one expires. Insurers are required by law in most states to cancel policies for nonpayment, Lehman says. The length of the grace period your insurer will allow before canceling varies from carrier to carrier.
"You don't want to have a gap," Lehman says. "Make certain that your new policy starts right away."
To avoid an accidental lapse in auto coverage, you can ask your carrier about setting up automatic payments that are withdrawn from your bank account, he adds.
Sometimes people have good reasons for canceling their auto insurance, such as finding another insurer that offers better coverage. If you cancel your policy before it reaches its expiration date, you may be able to get a partial refund, Foley says. The amount you receive will depend on your insurer’s refund policy.