Should I Switch to Liability Car Insurance?

Yesterday, I posted a nice story about an individual who saved a great deal of money by reading his auto insurance policy. I posted the story as an example of why you should read your policy in more detail, nothing more.

However, my readers (as they often do) took the post into a completely different direction that I didn’t even consider when writing the post, perhaps best summed up by Dave about twenty comments into the thread:

I think that we all understand that we should be checking our policies in the event we need to. However, I think the larger issue that should be covered here is the fact that he has full comprehensive on a vehicle that is worth far less than 3100 dollars. He’d be better off switching to liability and having a couple grand to go buy another junker when something like this happens. You never put a substantial amount of money into something that you can’t get that money back out of it later. Anyone agree?

Dave is absolutely correct: once the value of your car has depreciated enough so that the cost of significant repairs can potentially add up to the cost of the car, you should switch to just liability car insurance for that automobile. This is a valuable tip that anyone should follow, particularly anyone who regularly buys late model used cars as their primary vehicle (as I do). To read more about the different types of coverage available, read The Simple Dollar’s Guide to Car Insurance

I am currently in a position where the value of my primary vehicle is significantly higher than the cost of a major repair job, but the vehicle is steadily depreciating, and I’ll probably make the move to liability insurance within a year or so and stay with that.

For those who would like to see the big picture, here’s what I do with my auto purchases to maximize every dollar.

I buy a late model used car that still has a significant value to it. For the first few years, I keep comprehensive insurance on it because the car still has value much higher than the cost of a major overhaul, but with each passing year, the car’s value gets lower and lower. At a certain point (just wait for it), I switch to liability insurance because the car’s value is low enough that comprehensive doesn’t have a big benefit anymore. Then, I can take the difference in insurance costs and bank it so that I can afford a better car the next time around – or invest it in something else.

So where’s that magic point where one should switch? It’s largely a personal judgement call – there is no magic formula for deciding when you should make the switch. My general rule of thumb is that I switch to liability when a $4,000 repair bill would make me simply call the car a loss and trade it in for what I could get out of it; this usually occurs around the $5,500 mark for me in terms of book value. My truck will pass that line in about eighteen months.

Different people will give you different advice on this point, but there are so many variables involved here that it largely comes down to the amount of risk you feel comfortable with in your gut.

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  1. david says:

    Hi Trent, thanks for these posts. I am betting that most people did not know that comprehensive insurance pays for repairs, most people figure insurance is just accidents, theft, etc. As far as I have seen, if it is above your deductible amount, then they should pay for the balance of the repair. One thing to keep in mind though is that you do not want to keep having them pay for things, as it shows poorly on your insurance record and you could possibly be dropped. Not fair, I know, but it still can happen if you file claims too often.

  2. david says:

    Also, sorry, I forgot to mention that a lot of comprehensive coverage, depending on the state/city, do not cover repairs at all if not related to any kind of collision. For instance, Metropolitan in Mass says: “For instance, your damages are not covered if they are caused by wear and tear, freezing, mechanical breakdown or road damage to tires by potholes.”

    Anyway, just an FYI

  3. Koby says:

    There is one small issue with the gentleman in the original story. The article says,

    “…cost of it is more than the remaining monthly payments on my car…”

    That is a major factor in the insurance issue. Most auto loans require full comprehensive (read full coverage) on vehicles that have loans on them. So that fellow with the engine trouble can’t switch to liability only because his loan contract does not allow it.

  4. Tim says:

    again, READ YOUR POLICY.

    second, don’t forget to save that insurance deductible or save for that major auto repair in your emergency fund.

  5. kellie says:

    Koby beat me to it. He is correct, I couldn’t get a loan for my vehicle unless I had full comprehensive on it. So, I can’t switch to just liability until I pay for the entire thing. I wish it were always so cut and dry but it isn’t.

  6. Bucky says:

    Don’t mean mean drop collision rather than comprehensive? Comprehensive is relatively cheap compared to collision (for me, comprehensive is only ~1/10 collision).

  7. Lisa Knight says:

    I can say that we have comprehensive on a late model vehicle (we own, paid in full). Mostly because it is our only vehicle at the moment & being a mini van I wanted the extra glass coverage. Windshield cracks can happen often here in the lake effect snow belt of NY just driving down the road… So while it is an added expense it is worth it to our family to have, it’s probably a waste, but our policy gets us a rental during repairs, so we aren’t out a vehicle.

  8. Toby Getsch says:

    This conversation has gone sour. Here’s why.

    1-Insurance laws are different in different states. Some states are no-fault. Others are not. This totally changes the dynamics of what insurance you get and what makes sense.

    2-I don’t think anyone has been accurate when they think that comprehensive insurance pays for repairs when anything is in normal mode. Typically, comprehensive insurance is for fire, wind, theft, vandalism, and those sorts of things. It is definitely *not* for what most people would call repairs. That’s really bad advice and a bad thought process to think of comprehensive in that direction.

    3-Collision insurance was not mentioned and that is something that varies greatly by states. Most often collision covers your own car in an accident. In different states and with different insurance companies, the rules around at fault, no-fault, collision and comprehensive are different. Liability will cover the other person’s car, but collision covers your own. Knowing the difference between collision and comprehensive is critical. And, again, the laws in different states affect what falls into what category.

    Also, with any of these, there are many variables and limits and deductibles to consider. Because there are so many significant variables, excellent advice for one person is often ridiculously awful advice for someone else. There are a number of personal decisions about insurance. We all have different comfort levels, savings levels, income levels, etc. We need to take the time and we need to do our homework.

    Trent, you’ve done a great job trying to keep this simple and on topic for the high level intended. In the comments, we’ve gone deeper and often less wise in my opinion. Our comments have soured this topic and really made for some terrible, awful, bad advice. I look forward to hearing how you chime in and put us in our places. ;)

  9. Trent Trent says:

    Toby: it’s the diversity of opinion and thought that makes it interesting.

    However, it all comes down to reading and knowing your policy and what it covers.

    Auto insurance is a very hard thing to give specific advice on because it varies so wildly, thus to give advice that’s actually useful one has to speak in generalities.

    Please, readers, before you follow any of the advice, above all, read your policy!

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