You should hold on to full-coverage auto insurance until your annual premium meets or exceeds the estimated payout if your car needs to be repaired or replaced. If your car is five or six years old, the payout for replacement probably isn't worth what you pay in premiums.
This article will cover:
When should I drop full-coverage auto insurance?
In general, you should remove full-coverage car insurance from your vehicle if it isn't worth much or if it's old. Here's what you need to know about both situations.
Your car isn't worth much
The payout limits on your comprehensive and collision policies are based on the actual cash value (ACV) of your car. ACV is what your car is worth when factoring in depreciation. If your car is stolen or totaled, ACV is what you're paid out for a replacement. If your car isn't worth much, what you pay for full-coverage car insurance may be better off in a savings account.
Your car is old
Experian states that a new car loses 20% of its value in the first year of ownership, and continues to drop as time goes on. Every year before your car insurance policy renewal, check the current value of your car against a reputable source, such as Kelley Blue Book. If your annual premium upon renewal costs the same as or more than the payout limit on your policy, it's probably more cost effective to only carry liability insurance.
How does full-coverage car insurance work?
Full coverage car insurance is actually three separate forms of coverage; liability, collision and comprehensive:
- Liability insurance: This coverage takes care of costs that can arise from accidents you are responsible for, such as medical expenses and legal fees.
- Collision insurance: This is an add-on that covers the repair or replacement of your car if you are in an accident with another vehicle or a stationary object. Collision coverage usually takes care of damage you cause. If your car is damaged by another driver, their liability coverage should pay for your damages.
- Comprehensive insurance: This covers damage to your car that occurs due to perils other than collision. These include vehicle theft; falling objects, such as ice or branches; vandalism and hitting an animal.
When should I keep full coverage on my car?
If you are leasing a car or purchasing a car with a loan, your lender will require you to maintain full coverage on the car for the duration of your financing period. Lenders do this in order to protect their investment. After that, there are some good reasons to keep full coverage that are your own choice:
You have a newer car
Newer cars, especially brand-new ones, have higher replacement costs than even one-year-old cars. If you have a brand-new car and it's damaged or totaled in an accident, you could pay a huge amount for its replacement without proper coverage. Full coverage can save you from falling into a financial hole.
You have an expensive car
Even if your car isn't particularly new, certain makes and models retain their value better than others. This leads to a higher price tag if it's damaged. Unless you have a large savings account, full coverage can help you avoid spending money needlessly.
Your car is expensive to repair
Some cars have parts that are expensive to fix. Keeping full coverage on your policy helps you save a considerable amount of money if you need to replace a damaged or stolen part.
Should I drop part of my full coverage?
It's not necessary to completely get rid of full-coverage car insurance. Collision and comprehensive car insurance cover different perils, and the risk of these perils occurring can affect how worthwhile these coverage types are to you.
Is collision coverage necessary?
The three main reasons to let go of collision insurance are:
- Your car isn't worth a lot.
- You don't drive much.
- You can afford car repairs or its replacement out of pocket.
Collision coverage takes care of damage to your car if you hit another car or stationary item, such as a fence or sign. It can also protect you in the event of a hit-and-run accident. If you have an older car and can afford to replace it, consider dropping collision coverage and holding onto comprehensive coverage.
Do I need comprehensive insurance?
You might consider dropping comprehensive car insurance if:
- The value of your car is lower than your comprehensive coverage deductible.
- You plan to replace your car soon.
- Your car is older.
- Your car is garaged or otherwise protected.
Comprehensive coverage takes care of damage and losses involving your car that occur due to something other than collision. This includes vandalism, extreme weather or falling objects.
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