Posted on December 12, 2012 by Don • 2 Comments
One of the pleasures of owning a car is having to pay car insurance. I use the term “pleasure” loosely. While it hurts sometimes to make that semi-annual or annual car insurance payment, you can take comfort in knowing that should the unfortunate occur, you are covered.
While most times having sufficient car insurance coverage is needed, there are situations when you no longer need parts of the coverage. I am specifically talking about collision coverage.
The Different Coverages of Car Insurance
To keep things simple, I am breaking car insurance coverage into three parts: collision, comprehensive, and Medical. You can break these down further, but these are the three main areas of insurance coverage.
This coverage takes care of your car when you get into an accident with another car. It also covers you if you go off of the road and hit a tree or a house.
This coverage takes care of anything not covered by collision. Comprehensive coverage covers you for hitting a deer, vandalism, chipped windshields, scratches, dents and dings. (An important note: when driving down the road and a deer jumps out at you, it is best to hit the deer. If you hit the deer, it is considered comprehensive and in most cases does not increase your premium. If you swerve to miss the deer and hit a tree, that is collision and will increase your premium.)
This section of your insurance covers you and others for medical procedures and visits that might arise should you get into an accident.
Why Should You Cancel Collision
If you are driving a new car, most likely you will need to keep collision coverage. This is because you either have a loan out on the car and are required by the loan company to carry collision coverage or you don’t have $20,000 sitting around that you could use to buy a new car should your car get totaled.
If you are driving an older car, say five years or older, you should begin to look into canceling your collision coverage. This is because of your car’s biggest foe, depreciation. After five years, your car has lost much of its value. To confirm how much your car is worth, check out the Kelley Blue Book. NADA. and Edmunds TMV values for your car. All should be roughly the same. If you find the value of your car to be low enough that you can self-insure, meaning you have enough in savings to replace the car should it get totaled, then you can cancel collision.
If you find that your cars value is still relatively high, then you can hold off on canceling collision. You should certainly cancel collision on your car if the annual expense for collision coverage is 10% or more of the value of the car. This means that if your car is worth $5,000 then you should cancel collision if your collision coverage costs $500 annually. (Note that I am talking about the collision coverage portion of your premium, not the entire premium. Your bill should break out how much you pay for collision. Use that amount when making your calculations.)
For me personally, I do not have collision coverage on my car. The collision coverage would cost me just under $200 annually and my car is worth about $2,500. While the coverage isn’t 10% of the value of the car, I decided to self-insure because I can afford to replace the car if it were to be totaled in an accident.
Do a Self-Assessment
When looking into dropping collision coverage, you need to look at the entire picture. You may have enough in your emergency fund to buy a replacement car should yours become totaled, but if that will wipe out your emergency fund, you may want to think again. Here are a few more tips when making your decision:
If you decide to self-insure, save the difference. Whatever amount you were paying for coverage, put that money into a separate account so that it can grow and provide and extra cushion should you need it.
Even with the two calculations above, be sure to take into account your deductible. If you car is worth $5,000 and your deductible is $1,000 you will only receive at most $4,000 from the insurance company ( and most likely lees than that). If your collision coverage costs you $600 annually, you might want to cancel it if you have the funds to self-insure. Call you insurance carrier to find out how much they will give you should your car get totaled to get a better idea when making your calculations.
Finally, be sure to find out if any other coverage’s are unavailable to you if you drop collision. Some insurance providers will not allow you a rental car reimbursement if you drop collision coverage.
Overall, canceling collision coverage on an older car can make a lot of sense for many. At first it might seem a little scary knowing that you don’t have collision coverage. But when you look at how much it is costing you compared to how much you would get from the insurance company, that feeling of uneasiness quickly goes away.