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.
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. (Read "The real reason you're broke" and "What a car wreck could cost you" for more details.)
- 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.com offers 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.
| Rank | Most expensive cities | Average annual auto premiums | Rank | Least expensive cities | Average annual auto premium |
|---|---|---|---|---|---|
1 | Detroit | $4,759 | 1 | Eau Claire, Wis. | $868 |
2 | Philadelphia | $3,734 | 2 | Norfolk, Va. | $954 |
3 | Newark, N.J. | $3,241 | 3 | Raleigh, N.C. | $965 |
4 | Los Angeles | $3,021 | 4 | Burlington, Vt. | $1,001 |
5 | Hempstead, N.Y. | $2,764 | 5 | Sioux Falls, S.D. | $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.
Continued: When to keep full coverage