When Should You Downgrade Your Car Insurance?

Ad for Pay-as-you-drive car insurance by dlisbona on FlickrOne of the common nuggets of financial “wisdom” tossed out there by personal finance writers is the idea of downgrading one’s car insurance to save money. “Cut your collision or comprehensive coverage or raise your deductibles and save a mint!” they’ll say, but such comments don’t take into account the current status of the car in question, nor does it account for your own personal financial state.

How do you know when the time is right to downgrade your car insurance? First, let’s look at the insurance variables we’re looking at, then let’s move through the thought process of figuring it out.

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Types of Auto Insurance and Basic Terminology
… just so we’re all on the same page here.

Most states require that you carry at least liability insurance on your automobile as a minimum, so we’ll assume that in all cases you’ll continue to carry liability coverage. Liability coverage takes care of any costs or damage you may do to other people and property during the course of driving, including both bodily injury to others and property damage. These insurances are usually pretty cheap – the only thing you might want to be concerned about is that your coverage limit is quite high.

What we’re mostly concerned about is comprehensive and collision insurance. Collision insurance covers damage to your car when your car hits or is hit by another object, while comprehensive insurance covers losses resulting from incidents other than collision – floods, damage caused by external forces, and so on.

For more specific details on these definitions, check out The Simple Dollar’s useful car insurance guide.

For each type of insurance, you’ll have a deductible, which is the portion of any bill that you will be responsible for. So, if you have a $1,000 deductible and you’re facing $2,500 in damages, you’ll pay $1,000 and the insurance company will pay $1,500. You also have a premium, which is the amount you have to pay the insurance company to maintain the insurance.

What Do You Need?
Unfortunately, there isn’t a clear and straightforward answer to this question, and it’s because of that lack of clarity that people tend to over-insure – and personal finance writers can get away with simple statements like “eliminate your insurance and raise your deductible to save cash!”

First, should you raise your deductible? From my perspective, your deductible amount should always be directly related to your emergency fund. A single car incident shouldn’t be able to entirely deplete your emergency fund – if it does, you put yourself quickly at risk of something else happening. In fact, I often encourage people to have an emergency fund at least as twice as large as your deductible.

Given that, you can quickly figure out how much deductible you need based on your emergency fund. If you have an enormous emergency fund, for example, you may not even need comprehensive or collision insurance at all, as you have enough cash to just pay for the repairs or the replacement yourself out of pocket.

The way I see it, if you have enough emergency fund that you could pay for an entire replacement car in cash and only reduce your fund by half or less, you don’t need collision or comprehensive insurance. Liability insurance should be all you need. But, of course, most people aren’t in that situation, as it demands a much larger cash emergency fund than most people have access to.

Similarly, at what point should you entirely cut collision coverage and comprehensive insurance on an older car? It’s not an easy question to answer.

I’m currently in this situation with my pickup truck, which is more than a decade old and is approaching the 200,000 mile mark – it has a pretty low Blue Book value at this point. It’s reached a point where my family feels uncomfortable driving it any significant distance at all, so I mostly just use it for local travel within fifty miles of my home (going to the library, getting groceries, and so on). We intend to replace it by early next summer.

Given that, it may in fact make sense for us to drop down to just liability coverage on the vehicle. This would save us several hundred dollars over the winter, and if something severe went wrong with it again, we’d simply go ahead and sell it.

Ask yourself this honest question: if a significant repair needed to be done to your current vehicle, would that be the final push you need to replace it? If that’s the case, do you need collision or comprehensive coverage on that vehicle at all?

Between these two perspectives, you may find that comprehensive and collision insurance aren’t worth it to you. But you may find yourself also feeling unprotected without that insurance. Insurance does have a psychological benefit beyond any directly financial benefits – you can be confident in knowing that even if something bad happens, you’re covered.

If your signs are pointing away from needing collision and comprehensive insurance, but your gut is telling you it’s a bad idea, I recommend just raising your deductible nice and high. That way, you’ve got the security of the insurance while saving money as well. This may be the best option of all for people with used cars and a nice hefty emergency fund, but find that comprehensive and collision insurance makes them feel better about their car.

I look forward to hearing the comments of readers on this topic.

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  1. Shanel Yang says:

    My dad was a big risk taker — heck, he was out and out a gambler. He didn’t care much for insurance. He got away with a lot of savings by buying cash for vehicles and then dropping coverage to the bare minimum. I thought he was crazy and anyway never had the chance to try his strategy till 2002 b/c I never owned a car outright till then. Money was real tight back in ’02 and my car was old so I decided to try it. Took my coverage down to the legal limit. Don’t try this if you’re accident prone! But, I’m a great defensive driver and the only accidents I ever got in were minor fender benders that I never reported to insurance anyway and paid out of pocket for or accepted the other driver’s out of pocket. So far, so good. It’s not for everybody but it works for me! : )

  2. bigwinner says:

    As far as I understand, not paying for collision insurance is a good incentive for families to have old yet fairly reliable cars (I’m thinking like a mid-90′s Taurus which can be had with reasonable miles for $1500-$2000). Not only is the initial out of pocket expense less, but you don’t have to waste money on unnecessary insurance.

  3. I think it is worth pointing out that adequate liability insurance is often one of the most neglected areas of coverage. As a recent recipient of an auto injury judgement, I would advise all to carefully review this section of one’s insurance and make sure that the liability coverage is in considerable excess of one’s assets, especially if one is self-employed.

  4. Robin says:

    I hate the idea of cutting insurance. Everyone thinks they’re a good driver. News is, they’re not.

  5. Brian says:

    Since car insurance coverage differs from state to state, no wonder it’s so confusing. In Oklahoma, where I live, state law requires full coverage insurance for vehicles that are not paid in full. Therefore, if you’re making a loan or lease payment on a vehicle, you’re required to carry full coverage insurance. Only when the vehicle is paid in full can you drop to liability.

    I bought a new 2006 Toyota Matrix almost two years ago. I have about 4 years of payments left. So I have no choice when it comes to dropping my coverage, unless I want to increase my deductible.

    Thankfully I shopped around and found the lowest price thru a reputable, local, independent insurance company. Independent as in they are not affiliated or an authorized dealer of the big named insurance companies. I pay about $105/month for full coverage insurance. Other places wanted to charge at least double that. So while downgrading coverage or increasing the deductible can save you money, simply shopping around for the best price can save money too.

    And once you find the best deal, you’re not required to stay with the same insurance company. I shop around every six months, which is around the time most insurance policies are renewed. So far my current company still has the best price. And it doesn’t hurt to keep in touch with your current company to take a new look at your policy. Improvements in your driving record since your policy was changed can result in more discounts.

  6. Steve says:

    I have been thinking about how to adjust my insurance deductibles lately, so this is a timely article for me. Of course, I wasn’t able to come to a final conclusion based off of this article alone, but it has given me some food for thought.

  7. David says:

    As a Chartered Property Casualty Underwriter, I need to point out that wear and tear is generally excluded by your insurance policy. Additionally, the liability, medical payments, and uninsured motorists liability portions of your insurance policy will not have deductibles. The most important parts of an individual’s car insurance policy are liability and uninsured motorists liability. Many people are insufficiently covered. If you were to cause bodily injury to another person that required hospitalization or surgery, imagine the costs. Imagine the costs of hospitalization if a motorist that was uninsured or underinsured hit your car and caused you bodily injury. If you carry the minimum liability limits, this is bad for a number of reasons: (1) You will covered insufficiently for bodily injury or property damage you might cause (how much is it to pay a claim on a total loss for a 2007 Ford Expedition?), and (2) if you carry the minimum liability limits for your state, you are only allowed to take that amount in insurance for uninsured motorists liability. Most people do not realize that if you carry minimum limits of $25,000 or even $50,000 for liability, these amounts are insufficient to cover the average loss. The minimum liability is simply your state’s legal minimum. Remember that your car insurance liability is protecting your financial assets. If you are covered insufficiently for property damage or bodily injury you have cause by operating your car, the car insurance company will simply pay their limit and then send you a letter saying that your limits are exhausted. You are liable for the rest and will be sued. Another scenario is that a drunk and insured driver t-bones your car. You are injured severely, hospitalized, and miss a lot of work. Uninsured motorists liability coverage covers you in this situation or supposing that the motorist at fault had those terrible state minimum limits. Personally, I carry the highest limits on both liability and uninsured motorists coverage. One thing that is negative about raising your deductibles on Comprehensive and Collision to the highest points is that many insurance companies use these as underwriting tools rather than price breaks. There might not be much of a price break between $500 and $1,000 deductibles. Check it out – it’s not always a good deal. Homeowners insurance is a good example – my policy only gave me a $110 price break in annual premium between a $1,000 deductible and $2,500 deductible.

  8. David says:

    I meant to say “drunk and uninsured driver” in my previous comment. Another situation, suppose a drunk driver hits your car, injures you, totals your car, but the drunk driver only has $25,000 of insurance liabilty limit. Is that enough to cover your surgery, hospitalization, rehab, and buy you a new car, not to mention lost wages? NO. Uninsured motorists liability coverage is very important – it essentially functions as life insurance as well if you are killed. Liability is settled with your survivors. I’ve seen it numerous times in the claims business.

  9. Elisabeth says:

    But if something severe happened to your truck, who would want to buy it? You might wind up getting more from an insurance company (rather than selling or trading it) because it would probably be totaled.

  10. Anitra says:

    We only have liability on our 8-year-old truck – for exactly this reason. If something serious happened to the truck, we would simply replace it at this point (we’re probably going to replace it in the next year or so anyway).

    We DO keep a minimal amount of collision/comprehensive on our 6-year old sedan, even though it’s not worth a whole lot more than the truck. Partly for peace of mind, partly because it’s in better shape mechanically and we wouldn’t want to replace it yet. That said, our deductible is still somewhere around 1/3 of the car’s blue book value, which we could pretty easily afford.

  11. John says:

    I own a 1999 Honda Accord and in 2003 I increased my deductible from %500 to $1000. The savings in premium were well worth it. Less than six months later I was hit by an uninsured motorist. Since I had a $10,000 emergency fund, paying the $1,000 deductible wasn’t a problem. Quite to my suprise, several months later my insurance company recovered my deductible from the other driver. I’ll bet that wouldn’t have happened if I didn’t have an emergency fund.

    My car still runs great and I’ve never had a mechanical breakdown, however considering it is now 9 years old and has 210,000 miles, I decided to drop my collision/comprehensive coverage and now I only have liability. This makes perfectly good sense because I have a car replacement fund and can afford to replace the Honda without going into debt should it be totaled, stolen, or suffer a major mechanical malfunction. Consequently, my opinion concerning increasing your deductible and eventually eliminating certain coverages can be a sound strategy so long as you have an adequate emergency fund and there is enough savings in premiums to justify taking on the increased risk.

  12. Jeanie says:

    We have a 1995 Dodge Ram pickup with low mileage. We only use it for summer( mowing towing trailer etc). We dropped everything but liability. Then my DH had a summer job and drove it to work about 25 miles away. He hit a deer. $1400 later we checked on comp.; figures out about $5 a month.
    we put on our truck and convertible also. So the next deer we will be ready.

  13. Chris says:

    I have a 2001 Olds Alero that I’ve been driving with just liability for about 3 years or more now. I feel like I’m a good driver and my record seems to agree. Mostly I just hate monthly payments and like the feeling of saving a few bucks each month. I realize there is a small risk that I’ll get burned doing things this way, but I figure my car’s only worth $3500 or so anyway, so I’m not too concerned.

  14. Linda says:

    We run our cars until there’s not much left of them. If the cost of repair is more than what the vehicle is worth, we go back to purchasing “new” used from the car rental companies. Our Credit Union usually has the best loan rates. We have learned though, that because of our Umbrella Insurance policy, we need to keep our auto coverage at certian levels, and must keep our deductible somewhat low. Raising the deductible or getting rid of coverage would not work in our case. Perhaps you should do a piece on Umbrella Insurance.

  15. For all of your insurance, your financial plan should be to self-insure the small stuff and only insure against large losses and liabilities. This means large deductibles so that you can use the premiums you save to buy an umbrella policy.

  16. mk says:

    I worked for insurance agency for a couple of years, I see both end of spectrum. How you see the balance of coverage and premium will be hugely depend on your own experience and emotion, with some bitter claim results, or lack thereof.

    Basic idea behind adjusting the deductible is two-fold. Transfer the minor risk back to yourself (self-insured) instead of insurer (risk pooling) lower the premium. Also, it eliminate minor claims to file a claim, make your claim history much clean and maintain preferred risk.

    When you remove collision and comprehensive on your old car then change mind later, you may need a inspection to be covered. Comprehensive is more broad coverage including theft, and I rather keep this coverage with high deductible if your car is the only transportation and can’t afford that to deplete all your savings.

  17. Jared says:

    I recently downgraded my insurance. My cars value to the value of the collision/comp wasn’t worth it anymore. Also based on my Emergency fund being in good shape, I can afford the higher deductibles if something were to happen. Just one more reason an E fund saves you money.

  18. Kevin says:

    I looked at doing this with my 1998 Jeep Cherokee a couple years ago, but dropping to liability only wouldn’t save me that much – I think about $10 a month or so. For a car still valued at about $5,000 or so, to me that was worth it.

  19. Kristen says:

    Don’t forget that the insurance company can/will ‘total’ your vehicle for less than the ‘blue book’ value. e.g. My Grand Prix is worth $4K, but the insurance co said they would consider it totaled for damage more than $2K. So we’d only get $2K. Not worth it to carry comprehensive/collision coverage.

  20. STL Mom says:

    Just make sure your liability coverage is at least as much as your assets. You’d be amazed that a minor traffic accident can lead to hundreds of thousands of dollars of medical bills.

  21. almost there says:

    Good idea having the EF cover the cost of replacement of the car. I never considered that. I will have to look into that for my vehicles. My 2004 Vue is only worth half what I paid for it 3 years ago. I may be able to save a lot of money.

  22. Sense says:

    I’ve always driven (semi-reliable) beaters, never had more than the legal limit of coverage…and never paid more than ~$30 a month for car insurance. I was lucky and have never been in a major car accident on my own insurance (I totalled my mom’s car at 18, though!–no one else was hit).

    The only issue I have with that equation is the ‘minimum’ coverage part. what if I had hit a Mercedes? would that have covered the cost of the car plus damages plus medical?? Really, in this day and age, what is the REAL minimum you should have?

    The point is moot for me now since I walk or bus everywhere in my new foreign city. If there IS an accident here, the government pays for the medical costs! Car insurance is ‘voluntary’–meaning you can get it if you value your car, but most people don’t have it.

    i’m also so glad that no one can sue anyone in this country (New Zealand)!

  23. JP says:

    Trent,
    I had asked a question a while back about renting a house and wanted to get your thoughts on raising your auto insurance to get an umbrella policy. I decided to rent my house and pick up an umbrella policy (which required a higher auto policy) to cover any unexpected issues. I know your advice isn’t always for people in my position but thought I would ask for your thoughts on increasing insurance for the umbrella.

  24. David says:

    One coverage you don’t talk about here is Uninsured/Underinsured. The purpose of it, natch, is to cover you if you are hit by someone who *doesn’t* have liability insurance. Now, a couple of years ago, here in Texas, the state estimated that nearly a quarter of all the vehicles on the road didn’t have liability insurance, law or no law…It’s generally not very expensive, and–depending on how close you live to a state or foreign nation that doesn’t require liability–a nice safe way to protect yourself.

    Just somethin’ else to think about. Where I live, it’s worth the few bucks…of the four accidents I’ve been in in my lifetime, three were perpetrated by a fool with no liability insurance.

  25. I calculated the difference in raising my deductible a couple of years ago and am very happy with my decision.

    At the time I had a $500 deductible in case I was at fault in an auto accident. If I changed my deductible to $1000 I would save $300 for every year that I didn’t have an accident. In other words if I could go for 1.67 years (20 months) I would break even, and every year I went after that would be additional savings! It really does pay to be a safe driver!

    You simply need to ask yourself: “can I go this long without an accident or other claim?” Unless you’re an incredibly insecure driver the answer will always be YES!

  26. Chris says:

    Benjamin, I’m not sure I see the relevance of avoiding an accident and the question of raising your deductible, in that if you get in an accident, your premium will increase, regardless of your deductible… right?

  27. Anthony says:

    The pattern I have seen with my car insurance premiums is that increases in liability coverage are smaller and cheaper than decreases in collision and comprehensive deductibles. To that end, I’ve tried to have as high of liability protection as possible, while maintaining a collision and comprehensive deductible ($1000 FWIW) that I can easily cover by my emergency fund. Now I just need to find an insurer that offers a higher deductible!

  28. adam says:

    dude.

    what are some good “low cost” car insurance places?

  29. steve says:

    I suspect that it might clarify things to frame the issue in this way:

    Insurance companies make money by (expertly) estimating how much they will have to pay out in a given year to their pool of customers (etimating risk). The rates they charge are intended to cover all claims for the year and provide themselves a profit which, although large in dollars, is a relatively modest percentage of their overall business.

    As an example that I just looked up on Google, in 2005, GEICO had on operating margin of 10.1%. That 10.1% is all the cash left over after paying their claims, and before paying their operating expenses, (which ate up another 2%, leaving them with an 8% profit for the year.)

    So, for each of those who insured their autos with Geico in that year, and whose comprehensive insurance cost $80, GEICO paid out an average amount of $73 per year, and pocketed $7 for themselves. They took $1.40 and paid their employees, equipment, rent, and any financing charges, and kept $5.60 for themselves or their shareholders. (this is averaged across the entire pool of policies, of course you might not make a claim for 5 years, but the average cost per year for this year was $73)

    Now, you can cancel that part of your insurance and take on the risk yourself and reserve $73 in an insurance sinking fund, and save the $7 for some other purpose.

    But for that gain of $7, you are taking on the risk of having a cluster of incidents over relatively few years, which could sap your cash. However, if you’ve got the cash reserves to do it (I would say, if you have at least one claim’s worth of cash put aside for the purpose of covering damage to your vehicle that normally would be covered by your comprehensive policy), then you might want to go ahead and start putting the annual cost of the insurance into an ING account that would serve as an insurance “sinking fund”.

    Or, you could just say, “it’s just $7! and keep your insurance.

    I would be more inclined to cut off the policy if I had a safe place to garage the vehicle and/or I drove less than the average, which I believe is around 12,000 miles per year.

    For me, I don’t have the cash put aside yet to make cutting the insurance off prudent, although I do have a safe place for my car and I drive less than 12,000 miles per year. So I keep my comprehensive insurance, and I also choose low deductibles, following similar reasoning.

    if you have enough emergency fund that you could pay for an entire replacement car in cash and only reduce your fund by half or less, you don’t need collision or comprehensive insurance.

  30. steve says:

    that last sentence in my post above was from Trent’s post,–i forgot to delete it.

    One more thing that follows from my post: Keep in mind that when you cancel part of your insurance, the amount of the decreased payment is not actually all savings, you should probably consider 90% of it to be a deferred expense, since in the end you WILL have an incident/damage to the vehicle that you will need to pay for somehow. In the end you’re really only “saving” 10% or so of the nominal savings amount.

    It’s related to the psychology of the “low monthly payment”–it’s easy to disregard true total costs or savings when you focus only on the amount of a periodic payment or a periodic savings. To understand true costs, you have to think a lot more abstractly. When you think more abstractly, you can understand that spending $1 today is like spending the $1 plus the $2 of interest that you forego on investing the $1 for the next 20 years. Or that the car that costs “only” $200 dollars a month will cost you a total of $15,000 plus undetermined foregone interest when considered as a total purchase (a series of payments over time).

    Or that a payment that is reduced by $10 per month is probably really only reduced by $1 when you take into account that you will have to put aside $9 of it to wait to pay for the future expense of fixing your car.

  31. Lynne says:

    I recently sold my husband’s old truck after he passed away. My auto insurance premiums went up! Why? Because I had fewer vehicles insured, and one less driver. My agent suggested dropping the collision & comprehensive on the older car (both cars are paid for). Last evening I read on another financial site that when comprehensive & collision costs are equal or more than 10% of what the insurer will pay in the event of an accident, you should drop the coverage. I checked Kelly Blue Book & discovered that the value of my car is so low, I could easily replace it myself, and that my insurance cost is quite a bit more than 10@. So…I guess I am calling my agent Monday & dropping that coverage. It will save me $160 per year.

  32. steve says:

    Trent’s situation with the truck looks like a good candidate for dropping down to only liability, because he barely drives the thing from how he describes it. So if you take an average risk for an average driver, but cut the miles driven way down, from, say, 12,000 to 6,000 miles per year, you’ve halved the risk. The insurance company won’t lower your rates because of that, but Trent can do it himself by “privatizing” his comprehensive insurance costs, dropping his coverage and just putting the cash aside. On average, he’ll save 50% in this scenario.

  33. Johan says:

    I think you just gave us a way to dimension the emergency fund, Trent: Add the deductibles of all your insurances. Add a couple of monthly payments on your loans as well (depending on situation, of course). And living expenses for the same time. That way, if all bad things happen at once, you can afford it – at least for a couple of months. How many depend on the situation.

    //Johan

  34. Shevy says:

    Hmm, I wrote a relatively long comment and it seems to have disappeared into the ether when I hit “submit”.

  35. Janet says:

    I, too, am a CPCU with 20+ year in the insurance industry, and I agree with David’s comments above regardng uninsured/underinsured coverage. You need it; something like 1/3 of all drivers on the road don’t have liability insurance, at least in my state (Texas).

    The other thing to think about is a personal liability umbrella. If you have any assets at all, or anticipate having any in the future, it’s smart to have a personal umbrella that provides liability coverage on top of both your auto and homeowner’s liability coverage (one policy, sits on top of both). The cost isn’t usually that high, and if you cause a really serious accident and your liability limits are not sufficient to indemnify the other party(s), the personal liability umbrella will step in to make up the slack. Scrimp and save all you want on collision and comp, but make sure you have lots and lots of liability insurance!

  36. This is an excellent thread. Nice idea for a post, Trent. I especially like the feedback from insurance professionals. I’ve been fortunate in not causing a collision with injuries, but after reading through the comments I will definitely talk with my agent about increasing my liability and uninsured motorist coverage to the maximum as David (#7) discussed. He provides an intelligent perspective.

  37. Anne says:

    Excellent post. I’m 26 and have very VERY conservative insurance given how much I drive (very little) and how much my car is worth (maybe 3k). But my paid for ’96 Corolla only has 80k miles on it and I plan to keep driving it for quite a while. A car payment would be a huge financial burden and I don’t yet have a car fund built up to buy a replacement older car.

    This winter I fishtailed during a blizzard (had to go to work, it didn’t look like a blizzard at 8 a.m.) and hit a pretty nice mini-van. My bumper was shot and her driver’s side door needed to be replaced. Thank bob for my $100 deductible. The cost without it would have wiped out my entire emergency fund at the time plus some. For me, building my finances and cushions up is worth the little extra cost (I pay about $34/mo because our agent lets it stay bundled with my parents’ policies).

    At this point in my life my insurance works for me.

  38. Chris,

    Your are right in that your premiums will increase when you get into an accident regardless.

    But in regards to choosing either a $500 or a $1000 deductible on your insurance rates. You need to look at the cost difference between the two policies per year and decide if the savings is worth the risk.

    In my calculation, I would only have to drive a little over a year without an accident to come out ahead. In other words I would have saved more in insurance permiums than the additional $500 deductible I would have to pay in the event that I had an accident.

  39. Chad says:

    In my opinion, having anything less than $1,000,000 in liability insurance (usually by getting an umbrella policy) is gambling with your future. If you get in an accident and injure or kill a high wage earner, all of your current assets and future earnings are at risk. You can self-insure the comp & collision, but driving with only the state minimums for liability borders on insanity.

  40. Chris says:

    Ah, gotcha now Benjamin… thanks.

    BTW, Trent, this post prompted me to leave a message with my agent Saturday to get back to me Monday about raising my deductible. :-)

  41. Ryan Vaught says:

    Another dynamite article. For the record, this is one of the best quality sources for financial information I have found.

    One thing not mentioned was the element of risk. Insurance is a means to manage risk whether you have the money or not. If you don’t have enough to be self insured (emergency fund), then not having insurance is not an option. However if you do have the money, it might not always be best to carry low insurance. It depends on where you keep your risk (and how much you have). If you have low risk in other places (investments, income, liabilites etc) then having a higher risk on your car would not be a big deal. But if you are exposed to risk in other places you might be better off paying for higher insurance (reducing risk) and keeping your funds in a more risky investment (large risk exposure). It all depends on the numbers.

    Basically, if your emergency funds are held in a real investment and not a savings account you might actually get a higher return, then if you reduced your insurance and held them in savings. The idea is that you want to have the least amount of risk and the most amount of return. Higher return – marginal cost of increased insurance = max return. It all depends on what you get as a return, and what the additional insurance costs.

    But if you can’t get a premium return on your emergency fund, then reducing your insurance is the best way to maximize your return (in this case not paying for extra insurance/risk management) and minimizing your risk. For me personally, I like to risk my emergency funds at a medium level (stocks and business), hoping to get a medium return, therefore my best choice would be to carry medium insurance (not low). Carrying less would be increasing risk exposure, and carrying more would be overlapping/overpaying.

    Of course, if you are talking about 3K cars, this might be a mute point. But if you have a few nice cars, then you can start to see the reason for managing risk exposure.

    Just my two cents. Keep up the great articles.

  42. WTG Chris!

    Hopefully there will be significant savings in your near future!! ;)

  43. K says:

    Keep in mind that if you have no collision, you will have to pay to have your car towed to the body shop/junkyard since the insurance company will do NOTHING for you in an accident if you don’t have collision. Probably still cheaper than the premiums but something to think about.

    Also, I dont’ know if I agree about if you have enough in savings to cover a replacement car you shouldn’t have collision insurance. What if you buy a brand new car, and you have $50,000 in savings, so $25k would be plenty to replace it. Does that mean you shouldn’t have collision on your brand new $25k car? I think that comparing the cars value to the cost of a potential repair is a better gage.

  44. raanne says:

    As has been mentioned above – keep your under-insured/uninsured and your liability high! These are areas you do not want to be caught without.

    My understanding is that if you are ever without these, or don’t have it very high, and you are at-fault in an accident that someone is hurt in, when they sue your insurance company (which they will, at least for medical bills, maybe more) – if your insurance doesn’t cover the amount they sued for, *you* have to cover it.

    Usually insurance companies settle for the max amount in your insurance, but you can not depend on them doing that. Its one thing to worry about repairing your car, or buying a new one, but if you end up owing 100k above what your insurance covered, it will be a long time before you are financially stable again.

  45. Stephanie says:

    I want to point out that insurance laws vary considerably from state to state. You’ll want to check whatever you read here against your own state’s rules.

    All the discussions about the high deductible assume that you’ll owe it once, then have time to replace that money. But, there’s no guarantee that you won’t have multiple incidents in a short time period, even if you’re a good driver. A few years ago, my husband’s car was rear-ended by a driver who left the scene and a week later was vandalized in our driveway. We had a $500 deductible and owed $1000.

    If you have an older car that is going without collision/comp, you get to decide whether it’s totalled–which is an advantage. In 1996 I had an 85 Honda Accord that suffered serious damage after my husband side-swiped a semi. An insurance company would have totalled it, but I didn’t have coll/comp on it. I went to an independent body shop for an estimate on fixing it. I have to admit, I even cried a bit when the verdict was $2500. Then I suggested that the car didn’t need new parts, surely there were 85 Accords in junk yards? The repairman suggested that surely I could pay in cash? Yep. That reduced a $2500 repair job to $950. I had that car until 2000 and sold it, still running, for $1200.

  46. Crystina says:

    You also have to be aware of what will happen if you drop the coverage. I dropped the coverage on a 97 Toyota since the blue book was only around $3k. Not long after, I was hit by a girl coming out of a parking lot. Her insurance company tried to make it seem like the accident was my fault and I had to deal with a LOT of paperwork. My insurance company wouldn’t help with the paperwork since I had dropped the colision coverage, so I couldn’t really get much advice. I wound up getting a lawyer and in the end got the blue book value of my car out of her insurance company since it was totalled, but not having colision coverage meant that I had to deal with a nasty insurance company with no help from my own insurance.

  47. constant learning says:

    Always, always, always get the maximum medical coverage with your car insurance. For younger people, their greatest likelihood of needing medical care comes through an auto accident. If you have health insurance, this insurance will help with your deductible. If you do not have health insurance, this insurance will help with your medical bills. It is amazing how high medical bills can be – even if the accident seems minor. In fact, I know numerous people who have had to declare bankruptcy because they did not have medical insurance or health insurance and a car accident resulted in extremely high medical bills.

  48. Jim says:

    I agree with Trents advice on increasing the deductible.

    Personally I would say to drop collision /comprehensive if the insurance savings is going to be 25% or more of the value of the car and/or if the car is worth less than $2000. But the point at which you drop comprehensive is a personal judgement based on how much risk you want to tolerate.

    I agree with David above that people should strongly consider getting more than the minimum liability requirement. I carry $100k minimums since to me it seems a given that any kind of serious accident would easily cost that kind of money and I don’t want my insurance coverage to fall short. It doesn’t cost a lot more to get a higher liability and for me its worth the peace of mind.

    Jim

  49. justin says:

    Wow. I get the impression that waaay to many people are carrying collision/comprehensive. I was always told that if your yearly premium with comprehensive and collision was more than 10% of the value of the car, don’t get it. For my car, a 10 year old subaru, it’s very much not worth it.

  50. Roberta says:

    The most recent experience I had when downgrading my car insurance-We own 2 previously salvaged vehicles and carried full coverage insurance on both for nearly 4 years. When I called our insurance agent to ask if we should downgrade because we were buying another vehicle, I was told that if we had gotten into an accident the insurance company wouldn’t have covered it because of the salvaged titles. Do you know anything about this?

  51. gr8whyte says:

    My auto insurance company likes to review my coverage every few years. The last time I attended one of these, I was told people were carrying k$500 of liability and I should as well, I asked how much they were paying out on claims (mean and std dev) and they refused to release that information. I refused to increase my coverage.

  52. Xtine says:

    The difference between full coverage and liability only on my 97 escort was $8/6mos.

    I chose to keep it ;-)

  53. Bruce says:

    Another item to consider: If the car used to be your primary vehicle, but now it’s mostly for casual use, make sure that the insurance company classifies it as “casual use” and not “commutes to work”. The lower usage and the fact that you’re no longer driving it during rush hour mean that rates are reduced substantially for both liability and collision.

  54. dan says:

    Well, most insurance companies look at their bottom line and could care less about you. Take my company, Amica, who I will never ever use again. Well, a 16 year old kid ran a stop sign, causing me to plow into him at 40mph. fortunately only minor injuries, but my car was only 10 mnths old. I paid 28k for it (2007 prius) and it’s already had about 16 or 17k of repairs and still has many problems. After 10 months of arguing with them constantly, I finally got an attorney. Since the injuries were minor, most attorneys don’t want to take the case because the money is with bigger injuries. I’d never been in a wreck and my Amica agent told me that I should file the claim against my policy because it would “go faster and be less hassle” and because of that very, very poor advice, my rental car ran out after 30 days. 17k of work has taken about 90 days so far. Now they keep telling me that I have to prove that the remaining issues are due to the wreck and the car has not been trouble free since the wreck, and all issues are in the area of the impact. I called the guy who ran the stop sign’s company and they are rude and cocky. My insurance company should have tried to assist me in getting my car repaired to it’s original state. It’s not like I had a 1974 gremlin and asking for a 2008 escalade in exchange. This was the most expensive car I’ve ever bought and I bought it to reduce my carbon footprint. Now, I’m expected to drive a lemon for the remainder of the cars life. I’ve never sued anyone before, but feel that I have no choice to try to get the money to fix my car. Even then, when I do get it fixed, what’s my trade in value going to be? who would buy a car with 20-25k in past damages? Yea, go Amica. Be forewarned if you ever try to go with Amica, they will stick it to you the first chance they get.

  55. Auto Trade Insurance says:

    My auto insurance company likes to review my coverage every few years. The last time I attended one of these, I was told people were carrying k$500 of liability and I should as well, I asked how much they were paying out on claims (mean and std dev) and they refused to release that information. I refused to increase my coverage. it is very useful.

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