Dump the insurance on your clunker

By Liz Pulliam Weston

If you're paying for collision and comprehensive insurance coverage on an older car, you're probably wasting your money.

Yet many people I talk to 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 is often 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. Accidents or theft in these situations 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 "Will the loan outlive the car?" 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 underwater 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 was 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.

Continued: When to hold on

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