Dump the insurance on your clunker

Now dig out your last 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 them.

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. You might save 20% to 50% of your annual premium.

When to keep full coverage

But you probably shouldn't do that 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 comprehensive and collision coverage and buy gap insurance (read "Close the gap in your car insurance" for details). 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 payment 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 under water on the loan.

What if you're otherwise in OK financial shape but still balking about giving up comprehensive and collision coverage? You're probably thinking about insurance the wrong way. You're hoping the coverage will some day "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. You'll not only save on premiums, but you 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 Pulliam Weston's latest book, "Easy Money: How to Simplify Your Finances and Get What You Want Out of Life," is now available. Columns by Weston, the Web's most-read personal-finance writer and winner of the 2007 Clarion Award for online journalism, appear every Monday and Thursday, exclusively on MSN Money. She also answers reader questions on the Your Money message board.

Updated May 29, 2008

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