As Americans try to cut household spending in a lagging economy, auto insurance is one expense that might end up on the chopping block. In fact, the economic downturn in 2008 corresponded with an uptick in uninsured drivers, according to the Insurance Research Council.
Going uninsured affects your fellow drivers, who will have to turn to their own uninsured motorist coverage -- or their own bank accounts if they don't have uninsured motorist coverage -- if you cause an accident. But the decision to cancel or not renew your coverage also affects you. Trying to save a little money now is likely to cost you more in the long run.
Consequences of lapsed auto insurance coverage
Even the briefest of lapses in coverage can trigger penalties or make it more difficult (and expensive) for you to get covered in the future.
Gaps in coverage are red flags for insurers. Insurance companies have done a lot of number-crunching -- and they've determined that uninsured drivers are more likely to get in accidents, according to GMAC Insurance. Because your rate is based on how risky you are, a coverage gap in your history could result in a higher premium. Some insurers will even tack on a reinstatement penalty fee when you decide to get covered again, according to GMAC.
State penalties for letting your coverage lapse
Driving without insurance is illegal in most states. And in response to the rising number of uninsured motorists, some states are strengthening their enforcement of these lapses and beefing up the punishments.
In 2008, Texas introduced a new vehicle insurance verification system, TexasSure. This system is a database that combines information from more than 200 insurance companies with the records of registered passenger vehicles to identify uninsured drivers, according to the Texas Department of Public Safety. When a police officer pulls over a driver, he or she can run the vehicle's plates to see whether the driver's insurance coverage is current. This prevents drivers from simply buying coverage, printing a proof-of-insurance document and then canceling their policies.
More recently, Nevada has increased its penalties for lapses in auto insurance coverage. A new law that went into effect July 1, 2011, creates a tiered system of fines for uninsured drivers. Previously, a driver caught without insurance could pay a fee of $250. That still holds true for first offenses, as long as the lapse is less than 30 days, according to the Nevada Department of Motor Vehicles. But several long-standing offenses can result in $1,750 in fees and a minimum 30-day license suspension.
Some of these repeat offenders in Nevada also will be required to get an SR-22 insurance certificate. This is a certificate of financial responsibility that the insurance company must file with the state. If you drop your coverage, the insurer then notifies the state immediately.
What to do if you just can't afford insurance
Some drivers might want to keep their coverage but just can't afford to. Someone who is unemployed, for example, may be unable to afford insurance and, without a work commute, might rely on other members of the household for transportation. Many households are living paycheck to paycheck and simply don't have the money when premiums are due.
In these circumstances, tell your insurer or agent that you're dealing with a financial hardship. By raising your deductibles on your comprehensive and collision coverage or whittling your policy down to your state's minimum liability insurance limits, you might be able to lower your premiums to what you can afford. Or you might consider pay-as-you drive insurance, which bases your premiums on how much you drive. If you no longer have a long commute, a pay-as-you-drive policy (available only in some states) would reward you for staying off the road.