This post idea came to me from Kacie over at www.sensetosave.com. As most young people don’t have much in the way of income, we aren’t rolling around in brand-spankin’ new wheels. This brings us to an interesting choice when it comes to insurance on our ride. Should we have full coverage on our vehicle, or only liability protection?

Whereas liability-only insurance provides protection solely for the other motorist and their vehicle, full-coverage adds protection for your own car. It’s not a tough decision for a $10,000 car, but for a vehicle worth $1,500-2,000 it becomes a harder choice. To make the best financial decision we need to consider several things.

1. How much your vehicle is worth. If the blue book value is over $2,000 or so, it’s probably worth getting coverage on the car. That’s a big financial hit to take if something were to happen to it. If it’s not worth much more than the scrap metal, it would be a waste to have full coverage on it.

2. The difference between the two different rates. At age 14, when I had my school permit, I totaled my first car, a mint condition 92 Grand Prix with 52,000 miles :(. Needless to say, my insurance rates have been pretty high since. With my 94 Accord, full coverage was about $150 a month while liability-only was around $70. With that $80 difference every month, it made the decision more interesting. Two years of accident-free driving would save me almost $2,000.

3. The deductible that you will have to pay. The insurance company will get their cut if a claim is made, so keep this in mind too.

4. Your tolerance for risk. It is a financial risk to drive a car without coverage. Can you afford to lose this car if something were to happen to it? Sure you will save money by switching to liability-only insurance, but only if nothing happens to your car for some time.

No generic advice is suitable for this situation, and this is just a basic guideline. You’ll want to do plenty of research and compare quotes and plans between several different insurance companies. Then, you can do the number crunching for yourself. If you can’t currently justify liability-only on your car, remember that it constantly is depreciating, so at some point in the future it probably will make sense. Also, if you do only have liability coverage, you could get a jump-start on saving for your next car by putting the difference away each month.