What happens to car insurance when your car is sold?

Selling your car on the private market can be work, but you’ll get a lot more for it than you would if you traded it in at a greedy dealership.

In fact, the sales data collected by Kelley Blue Book shows that you’ll get between 15 and 25 percent more if you sell your car yourself. This extra profit could easily be used to cover the cost of insurance for your new car.

The key to making the most money is to prep the car, draft a detailed listing, and make your vehicle available for test drives.

As long as you choose the best sales channels to list your classified, you shouldn’t have a problem finding a buyer. After you sell your vehicle, you’ll need to transfer ownership and cancel your insurance on the car.

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Why can’t I cancel my insurance when I list my vehicle for sale?

If you’ve already replaced the vehicle or you have no intentions of driving it, it’s tempting to cut all of the costs to maintain it. One of those costs is paying for your auto insurance premiums.

Unfortunately, just because you’ve purchased a new car and you don’t intend to drive your car anymore doesn’t mean that you can cancel your policy.

In all but 3 states, you’re required by law to buy auto insurance when you own a car. As the registered owner of a licensed vehicle, you’re liable for any of the damages that happen in the car while it’s being operated.

Read more:

• If you just bought a car, do you need insurance?
• Can I cancel car insurance on a car not being driven?

If you were to cancel your coverage before you made a deal or signed over the title, you’d still be liable for anything that happens.

What are the consequences of canceling your coverage too early?

There’s more than just one consequence for prematurely canceling your insurance coverage. Even though you’ll save money at surface level, the penalties that you could face for going without even a minimum amount of coverage could be catastrophic.

Here are some of those penalties and some other consequences to consider:

• Penalty for Failing to Maintain Coverage on Your Vehicle –Many states use electronic auto insurance reporting systems that carriers must communicate through when an insurance policy cancels. Even though you’re not driving the car doesn’t mean that you can’t get caught without insurance on a car that’s registered in your name. When the DMV is notified, they will assess a stiff fine.
• Suspension of Registration or License – Not only do you have to pay a fee when digital records show the cancellation, you could also face a suspension of your driver license or your registration. If your registration is suspended, you need to get it reinstated before you sell the car or you could be in for an angry buyer. After all, the buyer will get stuck paying the fee if you don’t.
• Mandatory Court Appearance and Misdemeanor Conviction – If you’re meeting a potential buyer or you’re on a test drive, you could be cited for driving uninsured. Since the rate of uninsured drivers is high in many states throughout the nation, most state officials require owners who’ve been cited for this infraction to appear in court. If convicted, you’ll be fined and may have a misdemeanor on your record.
• Community Service – Even if you’re able to pay your fine, many states have imposed a mandatory community service penalty for uninsured drivers. This means you’ll have to pay to register and then must complete a minimum amount of hours doing work around your community. (For more information, read our “Can you cancel car insurance without penalty?“).
• Vehicle Impoundment – If your car is parked on public property or you’re driving your car and you’re pulled over, your car could easily be impounded because you don’t have the proper state-mandated insurance. Not only do you have to pay for a tow, you’ll also have to pay for the impound fees before you can get the car back. (For more information, read our “How do I get my impounded car back?”).
• Uncovered Claim – You want to sell your car for a profit, but it’s going to be much harder to sell if you have a loss and you don’t have damage coverage. You’ll either have to pay to get the repairs done on your own or call it a loss and sell it to a salvage lot. Not to mention you could get in trouble if you’ve damaged someone else’s car.
• Loss of Auto Insurance Discounts – You don’t just suffer legal consequences when you cancel your insurance too early, you could also affect your rates for years to come. Each year that you carry insurance you’ll be eligible for a loyalty discount. You can also qualify for prior insurance discounts. You won’t get either of these when you insure a new car if you cancel your cover.

When is the best time to cancel your insurance?

It’s best to wait until you’ve given the test drive and you have a signed bill of sale in hand before you cancel insurance.

Most experts would go a step further and recommend that you send in or process the release of liability transaction on your car before you put in a cancellation. In some states, the release can be submitted online through the DMV.

Read more: How does insurance work when you buy a used car?

Should you cancel your policy if it’s your only car?

If you sold your car and you plan on buying a new car in the future, you should consider just getting non-owner insurance coverage. This will help you keep your prior insurance credits and will also protect you if you rent a car or borrow a friend’s car. (For more information, read our “How Soon Do you Need Insurance After Buying a Car?“).

Some large companies offer standard car insurance and non-owners liability insurance.

Your auto insurance isn’t going to cancel itself when you sell your car, so it’s your duty to tell your insurer that you don’t own the vehicle in a timely manner.

If it’s your only car, you need to put your cancellation request in writing before it’ll be processed. When you need new insurance, it’s important to compare auto insurance premiums through many companies. Use an online rate comparison tool to take a quick look at costs and then make an informed insurance decision.

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