Should You Drop Your Car Insurance on Your Car?

Here's a bit of advice I found interesting. It's from Money Central and suggests when you should drop collision and comprehensive insurance coverage on your car. Here's what they suggest:

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.

They go on to add a couple caveats to this (such as you're upside down on the car and if you're financially strapped), but other than these, they think you should dump your coverage (note: they are NOT suggesting you cancel the liability portion of your car insurance.)

I don't know. This seems like a bit too early to cancel to me.

Now say your car was worth $2,000, your deductible was $500, you had more than $1,500 in your emergency fund, and the annual premiums were $200. At this point, the 10% rule works for me since your car is worth a small amount and you have a good emergency fund to cover most problems. But consider what happens with a higher-valued car.

If your car is worth $10,000, your deductible is $500, and the annual premiums are $1,000, is it worth it to carry no collision and comprehensive insurance? Not to me. Seems like it would be taking too much risk.

So I'd suggest that for cars in the $2,000 or so value level and below, this could be a good idea. But the more a car is worth, the less I think this strategy is a good deal.

What do you think?

Comments

[Bob]

I had a recent experience with a car I didn't own, in which I learned that my insurance company wouldn't cover any damages because I didn't have collision on any of my vehicles. They will extend coverage to another car I may be driving based on coverage I already have.

Since the incident I have put collision on one of my vehicles, now I should be covered if I put a dent in someone else's car. I probably could have paid 10 years in premiums over what this fender bender cost me out of pocket.

[Rick]

I'm convinced that insurance is unnecessary. Why? Because over time, the expected returns come out the same, with the exception that the insurance company must pay its employees/agents as well as post a profit. If you can insure yourself, then you can avoid paying the insurance company's operating costs and profits.

The only caveat to this is simply that this is a riskier investment. An insurance company spreads the risk over all of its policy-holders, so the risk of loss to you is very little; whereas if you insure yourself, the risk falls solely on you, and so the risk of loss is fairly high.

So it comes down to this: would you feel comfortable in making an investment that has a probability of hgih returns, but also a high risk of loss of principle? Do you invest in agressive investments? Then insurance yourself is for you. But if you're a more conservative investor, willing to accept lower returns for a lower risk of loss, then you should stick with using an insurance company.

[LivingAlmostLarge]

We dropped full coverage on our cars 4 years ago. It was too expensive being our ages and the worth of our cars. If we picked it up now our cars are worth maybe $4k, should be less but for some reason the gas prices keep it higher than expected. And so that extra $2k in premium is definitely worth dropping.

[Matt]

I take a slightly different view. If one has more than one car in the family, the advice in the article makes sense, because in the worst imaginable case, an accident will only cause a certain amount of inconvenience until the car can be replaced out of savings and income. Kill the extra coverage for all but the most expensive car, and max out the deductible on that one.

But if you don't have another car, and can't conduct all of your life's business on public transit for an extended period, then C&C insurance makes sense in a lot more cases. In that situation, you can find yourself needing to replace your car within 48 hours of an accident or else being set on the road to bankruptcy.