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Auto Insurance – When Should You Drop Collision and Comprehensive Coverage?
By JLP | April 26, 2007
Lenders require car owners to carry collision and comprehensive insurance coverage on their vehicles as long as there is a lien against them (meaning, while they are being paid off). Then, once the vehicle is paid for, it is usually up to the insured to choose whether or not to carry the extra insurance. I’m blogging about this because our Buick will be paid off in June, which means there will no longer be a lien against it and we will be free to drop our comprehensive coverage and collision insurance.
Since our Buick is still worth $10,000 – $12,000 and the premium for collision and comprehensive coverage is only $425 per year (with a $1,000 deductible) it’s a no-brainer to keep the coverage. I will probably keep the coverage until the value of the car is around $3,000. Why $3,000? It just seems like a good number to me. It’s low enough that we could cover it out of our savings. In other words, if something happened to our car when it was worth $3,000, it wouldn’t put us in financial strain to pay for it out of savings.
I dropped both comprehensive and collision on our Honda Civic last year, which reduced our premium by nearly $500. It’s nice to have an emergency fund!
Topics: Budgeting, Cars, Insurance | 47 Comments »
April 26th, 2007 at 2:31 pm
I have full coverage (I have a loan on the vehicle) and my insurance is $1800 a year!
When my loan is paid off … I’ll probably keep the full-coverage until the car worth around $5K.
April 26th, 2007 at 2:56 pm
These numbers mean nothing without deductibles.
April 26th, 2007 at 3:09 pm
Kurt,
Good point. I added a mention of our $1,000 deductible.
April 26th, 2007 at 3:25 pm
I would be tempted to drop my coverage with a $10K car paying $425 a year for coverage and a $1,000 deductible. $9K of exposure is something I feel like I could stomach, although the figures are pretty close.
April 26th, 2007 at 5:49 pm
Once my car is paid off (this year sometime) I will be in a similar situation. Worth about $10-12k…. I haven’t yet run the numbers to find out exactly how much my premium will drop, but with a $1k deductible I think I’m just going to drop the comprehensive coverage. If something really bad happens then I won’t feel too bad just buying a new (to me) car and financing it if I need to.
It’s a game of odds. What are the odds that I will incur $5k+ of damage to my own vehicle due to an accident in which I am at fault? In my 10 years and 100k+ miles of driving, I have never had that happen. I’ve had 3 or 4 very minor (less than $1k) accidents that were my fault, and one major accident (about $8k to my car, probably around $5k for the other party’s car) that was the other party’s fault (and covered by the other party’s insurance). So, if the next 10 years go like the previous 10, the money that I would have spent on my premiums will go to better uses. If not, as I said, I won’t feel so bad just buying a new car.
April 26th, 2007 at 6:31 pm
I just paid our yearly auto insurance premium and had the same dilemma regarding whether or not to carry collision on our 2001 Toyota Sienna. With a 1K deductible, however, our collision cost is only $97, instead of the $450 you mentioned. In fact, the total cost to insure the van is $335 for the year. It’s amazing how much insurance costs vary from state to state.
April 27th, 2007 at 5:07 am
Weekly Roundup – 04/27/06
Here’s a quick look at some of the articles that caught my eye over the past week.
JLP talks about when you should drop collision and comprehensive coverage.
Jim talks about how to talk salaries with your co-workers.
Flexo got a Nintendo Wii. A…
April 27th, 2007 at 4:15 pm
When thinking insurance, use the pain method to help determine the levels of coverage you purchase. On deductibles, keep the deductible high enough that it would hurt just a little to pay it. When it comes to the point of decision on keeping your property damage coverage, consider market value of the vehicle, as well as your ability to overcome the “trade in” loss should you total it out in an event of your fault. Only insure that which you can not self insure, after all, self insurance is basically what deductibles are. Also, there is no such insurance as full coverage. Coverage is specific to comp, coll., liability (load up on that one, it is necessary and cheap).
April 30th, 2007 at 1:41 am
It’s all a matter of what you think you can afford. The majority of accidents are going to be fender benders and cost of repair will usually not meet the deductible. I do think that keeping full coverage until your car is not worth what it was is a good rule to follow.
April 30th, 2007 at 5:44 am
It can be arguable whether to go for comprehensive cover, obviously if your car isn’t worth much then it may not be the best policy.
May 6th, 2007 at 7:51 pm
if i drove a Buick, I’d be compelled to drop my comp and collision coverage….I’d really be conflicted….
May 10th, 2007 at 10:45 am
I’d say no to dropping off of my collision coverage for a few good reasons…I’d rather go safe than sound when i’m driving my car (with respect to my pocket money).
May 10th, 2007 at 8:53 pm
My van has only 32000 original miles on it, it’s in excellent condition, Ford Club Wagon XL and current blue book as hight as $3000. I still carry full coverage and want to know if it’s time to save some money and drop all of it except liability and uninsured motorist? I’m 71 yrs. old and drive very little anymore. Thanks
May 22nd, 2007 at 1:44 pm
When I have enough saved to buy my next car, that’s when I drop the collision insurance. (Another plan would be to only wait until you have enough saved for a good down payment on your next car, but I buy old cars and pay cash.) Note: I do not spend money on cosmetic repairs, only on repairs that are required for a good functioning of the car.
I don’t think the current value of your car matters at all except that if the value is very low, than even the tiniest dent will be considered “totaled” by the insurance company. (I believe there’s some weird rule that if the damage exceeds HALF the total value of the car, it is considered total and you get money but lose the car unless you can negotiate something else.) (So Diane Marshall, if you’re car’s really worth only $3000, especially if you hardly ever drive, I’d drop the coverage and put the extra in savings.)
By dropping the coverage, you save lots of money (or maybe you pay it to repair people instead of insurance people!) And you’re less likely to make a claim, which will help keep your rates low.
June 29th, 2007 at 10:54 am
Many of my clients, over my 14 years in the business, tend to drop full coverage when a vehicle is $3000 or less in value. This may change on other factors – if a teen driver’s premium is causing the premiums to be way too much relative to a car’s value or if the insured has a vehicle that is very rarely driven, and other situations.
September 20th, 2007 at 1:49 pm
First let me caveat by saying that I do not carry comp or collision on two of the three vehicles in our household.
September 20th, 2007 at 2:01 pm
Finishing the comment above: According the the Federal Highway Admin there are between 6 and 7 million collisions per year in the US. There are about 240 million passenger vehicles on the road. Thus there is about a 2.7% chance of a particular vehicle being in a collision. Same source indicates just short of 3 trillion miles are driven each year by the same cars or about 12,500 miles per car (makes sense). On a per miles basis, there is a collision every 486,000 miles driven. Therefore, assuming the same 12,500 miles, a car has about a 2.5% chance of being in a collision in any year. These are gross averages, but if you can use them to calculate the expected cost of a collsion in a particular year. For example, assume a $12,000 car that is totalled (complete loss). The expected value of that loss is about $300 (2.5% x $12,000). Compare that to the comp and collision premiums and you should get a crude but directionally correct estimate. Bottom line is that the insurance company is performing the same risk calculation and building in profit so the premium should always exceed the expected cost. Remember that skipping comp and collision is tantamount to self-insuring so be sure and have the “reserves” available should you need a new car.
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February 26th, 2009 at 1:58 pm
Anyway, back to the insurance question… The ‘pain’ method, the $3k rule, some use the 10 year rule are all good rules of thumb. It really comes down to what kind of a loss can you absorb? Also, your collision coverage doesn’t just cover you if you have an ‘at fault’ accident. If you’re hit by an uninsured motorist, of which there are way too many, you will be responsible for repairing your own vehicle. This also falls under the collision coverage.. subject to the deductible.
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June 17th, 2009 at 9:11 pm
It's totally a personal call. There is no right or wrong answer but be aware if your vehicle is damage more than 50% of total value it is considered a total loss by the insurance companies and they won't fix it. They will only cut you a check for "their perceived value". As an ex-insurance employee you should see how they try to cut corners and low ball there policy holders.
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August 15th, 2009 at 3:22 pm
The people posting about the 50% rule (company will total the car if repair cost is more than 50% value) should know that is not true of all insurance companies. I had a major collision in a car that was a year old and cost $14,000 new. It held it’s blue book value well over the year I owned it, but still was only worth about $12,000 when I got in a head-on caused by another driver, who was uninsured. The repair cost was over $8000, since they had to replace the front part of the car, basically. When I got the $8000 estimate to fix a $12,000 car, I assumed it was totalled and my insurance company would give me a settlement to buy another car. They didn’t! They paid the $8,000+ and had my car fixed, while trying to get the other driver to pay up for causing the accident (doubtful they did, he was a retired preacher living in a poor neighborhood). But that’s just to show you that no, they don’t always total the car, even when it would make sense to do so. I would have had to disclose the major accident when and if I sold the car, and that would have reduced its value below even what it was, even though the repair was perfect (it happened almost ten years ago, and the car still looks and runs great).
August 18th, 2009 at 1:03 pm
What the article doesn’t say is the insurance company will refuse to pay for the repair of a car that isn’t practically brand new. Instead the insurance company will “total” the car and pay you well below market value. This means that with collsion and comprehensive after the loan is paid off, you are basically paying for NOTHING. I say, drop it once the car is six or seven years old. It’s not worth it!
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September 18th, 2009 at 10:58 am
If you self-insure, then you are taking on all the financial risk in case something happens. Insurance allows you to transfer that risk to someone else (the insurance company) for a premium. There are several factors that need to be considered when determining whether or not it’s financially feasible to pay that premium so someone else would take on the risk instead of you.
One factor is the additional cost of keeping comprehensive and collision above and beyond the cost of liability. For example, if dropping comprehensive and collision (but maintaining liability) will lower your monthly insurance payment from $100 to $55, then your premium to transfer your risk to the insurance company is $45 a month.
A second factor is the declining market value of your vehicle. Although premiums may drop while the value of your vehicle drops, it’s unlikely they will drop proportionately. In other words, your vehicles value may decline at a faster rate than your premium. For example, consider a vehicle that was worth $8,000 three months ago but worth only $7,000 now. Now consider that your premium hasn’t changed.
It’s unfortunate, but we also have to consider the screw factor. You should realize in advance that if something unfortunate does happen, there is the real possibility that your relationship with the insurance company will turn adversarial (and in a hurry), so don’t forget to include this as a part of your consideration. For example, if your $8,000 vehicle has a $1,000 deductible, don’t think for a moment that you’re going to get a check for $7,000 in the event that your vehicle is totaled. Do not fail to consider this factor. Think of your relationship as being a ship at sea—you are the ship and the insurance company is the water. All if fine when the waters are calm, but water cares not about what is moral and what is not when your insurance claim brings about a storm.
A fourth factor is determining the financial impact of having to come out of pocket should something happen. If you have a few thousand dollars in savings earmarked for such a purpose, then an accident may result in being no more than an inconvenience, but if you have no savings and are financially strapped, then what could have been a mere convenience could result in a full blown crisis. Ask yourself to what extent will losing your vehicle (with no insurance beyond liability) devastate your financial world.
I do not have a calculus formula to bring this all together, but for many people, I suspect they should carry some form of protection beyond liability if their vehicle is worth more than $5,000. Also, I wouldn’t see a great pressing need to carry comprehensive and collision if the vehicle is worth less than half that, so the decision to keep or not keep it would likely fall between $2,500 and $5,000—exceptions do apply. I would tend to gravitate towards the low end if you have no savings and towards the high end if you do.
At any rate, those are a few quick thoughts I had on the issue.