Updated: 9/16/2010 11:01 PM ET|
Dump the insurance on your clunker
You may not need full coverage for an older vehicle. Instead, consider dropping everything but liability insurance; the savings could help pay for your next car.
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:|
|Rank||Most Expensive Cities||Average annual auto premiums||Rank||Least expensive cities||Average annual auto premium|
|1||Detroit||$4,759||1||Eau Claire, WI||$868|
|3||Newark, NJ||$3,241||3||Raleigh, NC||$965|
|4||Los Angeles||$3,021||4||Burlington, VT||$1,001|
|5||Hempstead, NY||$2,764||5||Sioux 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.
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The author must not really understand what he has purchased on this own insurance. True that you do not need full coverage on an older vehicle and not required to have such, unless you have a lien on it. But NEVER cancel the comprehensive coverage. Keeping that coverage with a $50 or $100 deductible, or NO deductible - the premium is very low - you will never miss those few dollars a month - you would miss your morning coffee froma drive-thru more. This coverage protects you from fire, theft, vandalism, tree falls on it, rock hits the windshield, even hitting a deer in some states, as well asFLOOD! (How many people have lost cars in floods in the last 10 years?) This covers about everything other than a moving collision.
Also, on Liability coverage - just make sure you have enough to protect YOU - as well as the other guy! Some states are still only requiring you carry $10-20-30,000 in property damage. With the price of new(er) vehicles - what if YOU cause a wreck that results in a high value vehicle being totaled (SUV, BMW, Mercedes, etc). Say that car was worth $34,000 and you only have $20,000 - bet you do not have the funds to pay the additional $14,000 - can you spell bankruptcy or garnishment? And we have not even talked about the Bodily Injury someone might have suffered in such claim.
Here is another senario - YOU get hit by a drunk driver this weekend - who is uninsured - he did not pay his insurance and now has none. You have serious injuries and have surgeries and tons of medical bills and now unable to work. Sue? Well, that could take YEARS to settle.
How much can you collect under your own insurance policy? How much will it pay on the replacement value of your vehicle and how much on your medical bills and disability?
If you have questions, find an agent that knows his business in protecting YOU - not just making your vehicle legal and collecting premiums. You have the right and responsibility to know and understand your insurance coverages!
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