If you’ re like me, the idea of going over the details of your auto insurance policy can make your eyes roll back in your head. It may seem easiest to simply continue with your current policy, even if you pay for full coverage auto insurance. But adjusting your policy—which can be the most expensive aspect of owning your car after the purchase price—can lead to substantial savings and lead to more affordable auto insurance.
Full coverage auto insurance generally refers to a policy that includes comprehensive and collision insurance in addition to the state minimum. Comprehensive insurance comes in handy if your car is stolen and not recovered, or damaged by anything other than a car accident (e.g. fire, flood, or act of God). This will pay for your car to be fixed or replaced for the amount that your insurance determines to be the car’s actual cash value, minus your deductible. (For a general estimate of your car’ s worth, consult Kelley Blue Book at www.kbb.com). Collision coverage pays for repair or replacement (minus your deductible) in the case of a crash.
The question is when these types of coverage are necessary, and when you can pocket the money you’d otherwise send to insurance. Up front, you should know that unless you have paid off your car loan, you won’t be able to drop full coverage. After that it depends on the age and value of the car. A newer, more expensive car ought to carry full coverage and an older, cheaper car should not. But what if you drive a car somewhere in the middle range? How do you know if you are carrying too much coverage?
There are several factors to consider. For example, seven of the ten most commonly stolen cars in the United States are more than a decade old. So even if you drive an older car, if you can’t replace the car yourself, you might want to keep your comprehensive insurance.
Something else to consider is the cost of parts. If you drive a European car (which typically do not hold their value) or an older reliable car, such as a Honda or Toyota, you can expect the price of parts to be prohibitive. Damage to a single part can “total” a low- or mid-value car, even if the car is otherwise drivable. In that case, it does not make fiscal sense to keep collision coverage. A fender-bender could result in the total loss of your car, and it would be difficult to buy a replacement with the Blue Book value. Your money is better spent in saving for a new car.
A final factor to think about is where your car spends most of its time. Urban drivers face many more automobile hazards than suburban or rural drivers. If you are carrying full coverage and do little to no city driving, consider changing your auto insurance policy.
Whatever plan will give you enough money to put you back on the road after a loss will be the one that is best for you. For me, that meant reviewing my auto insurance policy and raising my deductible initially. I saved the difference in my payment until I had enough put away so I could afford to drop my full coverage. Now, I can buy a replacement vehicle should my 12-year-old Mazda go to that big garage in the sky.
What about you? How did you decide when to drop full coverage auto insurance?