When Should You Downgrade Your Car Insurance?

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If you’re budgeting and trying to decide where you can save more money, you may have wondered if you should downgrade your car insurance. Doing so may give you less protection for accidents you may encounter on the road, however, you could be paying for more coverage than you need for no reason.

Before downgrading your insurance, you should analyze your own needs, your personal driving record, your overall budget and the amount of risk you want to avoid while driving. Take a look at the different types of car insurance available to you and the questions you need to ask yourself before downgrading your car insurance.

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Questions to ask

  • What’s the minimum car insurance required by my state?
  • Do I need comprehensive or collision insurance?
  • How much can I afford on a deductible?
  • How much can I afford on a premium?
  • How much can I afford on out-of-pocket car repairs?
  • How much is my car worth?

Types of Car Insurance and Basic Terminology

Most states require that you carry at least liability insurance on your car 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.

Common scenarios for downgrading car insurance

Even after asking yourself some of the important questions surrounding your budget and insurance needs, you may still need some help deciding whether to downgrade your insurance. Compare your situation to some of the most common scenarios in which people should or shouldn’t downgrade their car insurance.

Downgrade if you have enough saved up

Perhaps you have a strong emergency fund. With liability insurance, you would have to use your savings or emergency fund to pay for any repairs or even a new car if yours is totaled. In this case, it may be a good savings technique to downgrade your insurance as long as you would be able to retain at least half of your savings after paying for a new car or repairs.

Downgrade if you own an old car

Is your car in the last leg of its life? Downgrading your insurance, for the time being, maybe a good option to help you save money. In this case, if you were to get in an accident that required car repairs, you could choose to buy a new car instead of spending any more money on the old one. In this case, you would also need some savings to purchase a new car, and we recommend switching back to comprehensive or collision insurance once you’ve acquired a new car.

Don’t downgrade if you own a brand new car

If you’ve recently purchased a brand new car, chances are your budget is slim while you’re still making car payments. If you were to transfer your car insurance so that it only covers liability, you will need to pay out-of-pocket for any damages that occur to your own car while driving. In this case, it would be pretty risky to downgrade your insurance unless you had enough cash on hand to completely repair or replace your car.

Should You Downgrade Your Auto Insurance?

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?

How to downgrade your car insurance

In order to downgrade your insurance, simply contact your current car insurance provider and explain to them your situation. The representative may push back on you, but at the end of the day, it’s your decision. As long as you know you’ve made a good decision, you’ll be able to lower your insurance and annual premium costs.

Keep in mind that lowering your insurance will likely raise your deductible, so this means you’ll need to ensure you have enough savings to cover the new deductible and any additional repair costs should you get into an accident without comprehensive or collision insurance.

The Bottom Line

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 direct 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.

Find the Best Car Insurance

Enter your ZIP code below and be sure to click at least 2-3 companies to find the very best rate.