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Related topics: insurance, insurance rates, car insurance, financial planning, Liz Weston

About half of the average auto insurance premium goes toward collision and comprehensive insurance. If you're paying for this coverage on an older car, you're probably wasting your money.

Yet many people are reluctant to drop this coverage, which pays for:

  • The damage you do to your own vehicle when you cause an accident.
  • The loss you suffer when your car is stolen or damaged by something other than a crash (such as a falling tree squashing it flat).

Collision and comprehensive coverage are two of the three major components of car insurance. The third is liability coverage, which pays for the damage you do to other vehicles and people.

Liability coverage cost an average of $475 in 2007, the latest year for which Insurance Information Institute statistics are available, while comprehensive coverage cost $301 and collision insurance $136.

Though you always need liability coverage, and probably a lot more than the minimum, dropping collision and comprehensive insurance can be a smart way to save money.

Not a snap decision

Deciding when to let go of this coverage, though, can be a challenge. The old rule of thumb, that you should ditch it after five years, no longer works for many people because:

  • Many cars retain their value better than in the past. In the old days, vehicles were less expensive, and values often dropped sharply over the years. Now, cars tend to cost more upfront and hold their values better, meaning you'll get a bigger payoff from the insurance company if your car is totaled or stolen.
  • Many folks are "upside down," owing more on their vehicles than they're worth. An accident or theft in this situation can be a financial disaster; you'd need to come up with money for another car while still owing on the old one.
  • Many people live paycheck to paycheck. Without savings to tap to buy another car, they face higher financing costs and years of being upside down on their loans if they have to replace their vehicles.

To see where you stand, you should first look up the value of your car so you have some idea what your collision and comprehensive coverage would actually pay. MSN Autos offers Kelley Blue Book values, and Edmunds.comoffers additional used-car pricing information. You might want to check more than one source, because the prices they quote can vary.

Although you can't predict exactly how much your insurer would send you if your car were totaled or stolen, you can probably expect a check for an amount between the car's average trade-in value and what a dealer would charge. The "private-party sale" value is often a good proxy for what you'd get.

Now dig out your most recent insurance-premium statement. If the annual cost for collision and comprehensive insurance on your car is more than 10% of what you'd get from your insurer, then it's time to consider dropping such coverage.

Say you have a 10-year-old Honda that's worth $4,000 in a private-party sale and have a $500 deductible. Your risk is $3,500. If your premiums for collision and comprehensive are more than $350 a year, it may be wiser to bank that money toward a newer car.

Many people could realize big savings by getting rid of these coverages. Although the cost for this insurance tends to decline as the value of your car declines, you'll probably save at least 20% and perhaps as much as 50% of your annual premium.

The most and least expensive cities for car insurance:
RankMost Expensive CitiesAverage annual auto premiumsRankLeast expensive citiesAverage annual auto premium
1Detroit$4,7591Eau Claire, WI$868
2Philadelphia$3,7342Norfolk, VA$954
3Newark, NJ$3,2413Raleigh, NC$965
4Los Angeles$3,0214Burlington, VT$1,001
5Hempstead, NY$2,7645Sioux Falls, SD$1,003

Source: Runzheimer International. Data current as of June 2008. Assumes $100,000/$300,000/$50,000 liability, collision and comprehensive insurance with $500 deductibles, and $100,000/$300,000 uninsured-motorist coverage

When to keep full coverage

You probably shouldn't drop collision and comprehensive insurance if:

  • You're upside down. If you owe thousands more on your car than you'd get from your insurer, you'd be smart to hang on to full coverage and buy gap insurance. You're probably required to keep collision and comprehensive on the car as a condition of financing, anyway.
  • Your finances are running on the rims. If you have no savings, your credit cards are tapped out and your credit scores are in the tank -- in other words, if even a small insurance payment could make the difference between a crisis and a manageable pain in the butt -- then consider keeping comprehensive and collision coverage. The insurance check would serve as your down payment on the next car, which might help you get a better interest rate and reduce the time you're upside down on the loan.
  • You rent cars a lot and don't want to pay for optional coverage. If you have comprehensive and collision coverage on your personal vehicle, your policy typically provides the same coverage on rental cars. Drop the coverage, and you usually won't have it on the rental, either, unless you use a credit card that provides the coverage or you buy the optional coverage the rental agency offers.
  • What if all indicators point to dropping the coverage, but you're but still balking? You're probably thinking about insurance the wrong way. You're hoping the coverage will someday "pay off" and prevent you from having to dig into your own pocket to cover your losses.

The better way to think about insurance is as protection against catastrophic loss -- something that you couldn't easily pay for out of pocket. Reserving insurance for disastrous events, rather than using it for everyday costs, will save you serious bucks over time. Not only will you save on premiums, you also won't be tempted to make claims that could cause your insurance costs to skyrocket.

If you can't quite bring yourself to get rid of the coverage you don't need, at least boost your deductibles to $500 or $1,000. Keep that much cash in the bank to tap in case you need it, and you'll be miles ahead.

Liz Weston is the Web's most-read personal-finance writer. She is the author of several books, most recently "The 10 Commandments of Money: Survive and Thrive in the New Economy" (find it on Bing). Weston's award-winning columns appear every Monday and Thursday, exclusively on MSN Money. Join the conversation and send in your financial questions on Liz Weston's Facebook fan page.