When to drop “full coverage” auto insurance.

In a prior blog post, I talked about why there is no such thing as full coverage auto insurance. However, the public, and even some insurance agents, use it as a slang term for having Comprehensive coverage and Collision coverage.

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Comprehensive coverage & Collision coverage pay for damage to your car, above your deductibles, up to the Actual Cash Value (ACV) of your car. The ACV of your car is basically your car’s market value. When you have Comprehensive coverage and Collision coverage, your insurance company does not determine the ACV of your car until you have a claim with damage more than your deductible, and the ACV of your car will be its ACV based on its condition the moment before it was damaged.

As a car gets older, it may make sense for you to remove Collision coverage, and sometimes Comprehensive coverage, too, because the ACV of your car, less the deductible, is too low to make paying for coverage for damage to your car worth it.

Dropping coverage can save you money, but a better alternative is to shop for the best auto insurance rates before you look at reducing your coverage.

Some agents, or car insurance articles, say as a rule of thumb, to drop Collision when your car is older than 7 model years old. I think this is a bad rule. Everyone should consider their individual financial situation.

I have had wealthy customers buy brand new luxury cars with cash, and decline to insure the new car for Comprehensive coverage & Collision coverage, because the customer had the money on hand to replace the car themselves if anything happened to it.

I have also had young customers, working their way through school with a low-paying part-time job, who needed to keep Comprehensive coverage and Collision coverage on a 15 year old car, because they would need the $2500 insurance settlement if the car was wrecked, or they would be unable to get a replacement car, which they need to get to work and school.

Older cars with good gas mileage are holding their value these days. Sometimes a good used car, only a few years old, is worth close to the same amount as a new car.

“Rules of thumb” can sometimes be “rules of dumb.”

Here is what you should do if your car is older, and you’re thinking of removing coverage:

1. Don’t reduce your Liability or Uninsured Motorist coverage. The age of your car has nothing to do with the dollar amount of damage your car can do to another person’s car or property, or the cost of injuries to people.

2. Know the market value of your car. If you total your car, your insurance company will look at recent sales in your area for cars similar to your car in age, model, and condition. The ACV dollar amount is based on actual sales, so someone asking for $10,000 for his 1991 Geo Metro on Craig’s List, does not count as a comparable sale for your 1991 Geo Metro, which was stolen from you, because no one is going to pay $10,000 for a ’91 Geo.

3. Look at car ads for similar vehicles to determine the market value of your car, but be conservative. (Warning: if your car has greater value because it is unique, customized, restored or in mint condition, you may not be properly insured. I will discuss what to do for these cars in a future blog entry).

4. When you feel you have an accurate, but conservative market value for your car, subtract your Collision deductible from the market value. This new amount is your expected insurance settlement if you total your car.

5. Compare your expected insurance settlement amount to how much you pay for Collision coverage. Is the cost of the insurance premium worth the potential settlement for you? Is the juice worth the squeeze?

Let’s look at an example:

You do a little research, and you are pretty sure your 8 year old car is worth $5,000. You have a $500 Collision deductible. If you crash your car, and it is a total loss, you expect to get $4,500.

If you have $4,500 in the bank, and you are okay with saving it as a car fund in case you suddenly need to buy a replacement car, you may want to drop Collision, and put the money you were spending on Collision coverage in the bank, to supplement your car fund.

Another rule of thumb, which may not be dumb, is to drop Collision when the 6 month premium for Collision is 10% or more of your expected insurance settlement.

If your 6 month premium for Collision is $200, but you will get only $2,000 from the insurance company, you can have $2,000 in the bank in 5 years if you drop Collision and save the cost of the Collision premium.

Dropping Collision makes even more sense if your car is now a beater, and you could get only $1000. If you drop Collision and drive 3 years without wrecking it, you will have more than $1,000 in the bank.

What if you don’t have the money in the bank to buy a replacement car — like a lot of people?

Can you get around without a car, or do you have access to another car at no cost? If so, you can get by without Collision coverage, but you better be sure you don’t need a car. I went two years without a car, and I got by, but not having a car was a huge inconvenience.

You could finance another car, but even if you have great credit, the cost of financing a car may make keeping Collision coverage worth it.

Weigh the cost of the premium versus what you have to lose, and decide for yourself.

If you drop Collision coverage, you can file a claim against someone else’s insurance if they are responsible for damaging your car. But even if the truth is on your side, the other insurance company may not agree their customer was at fault, or there may not be evidence or unbiased witnesses to prove it. When disputes like this develop, you can always place a Collision claim, if you keep the coverage.

Be sure to add Uninsured Motorist Property Damage coverage, if it is available in your state, to protect your car from hit-and-run and uninsured drivers, if you drop Collision. It usually costs only a few dollars every 6 months.

On older cars, I recommend looking at dropping Collision coverage, which covers your car if it is damaged in a collision. But I recommend keeping Comprehensive coverage, which covers damage to your car, above the deductible, if it is stolen, flooded, damaged by a fire, vandalized, etc.

Comprehensive coverage usually costs less than Collision coverage, and it covers things less in your control, like if someone steals or vandalizes your car. Many people drop their auto insurance coverage to ‘Liability only,” without knowing how inexpensive it can be to keep Comprehensive coverage (By the way, know what you are buying — never ask for the state minimum insurance coverage, or full coverage. Have your agent explain each coverage, and decide what you need, rather than possibly have your life ruined by not having the right coverage when you have a claim).

A lot of people don’t know you can drop Collision, but still keep Comprehensive coverage, and vice versa. Comprehensive coverage and Collision coverage are separate coverage, and you can keep them independently of each other — depending on your insurance company’s rules.

However, if you have an older car, and you pay a lot for auto insurance, look at Comprehensive like you look at Collision. Is the cost of the 6 month premium worth your potential settlement? Remember, people never expect they will have a claim until they have one, and often, they wished they had more coverage when they do have a claim. So, decide to drop coverage wisely.

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