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.