When Should You Downgrade Your Car Insurance?
To make matters more complicated, many people bundle different types of car insurance together. And each type of insurance — such as comprehensive and collision — offers different protections to the driver.
When should you drop or keep collision insurance? What about comprehensive? And what’s the difference between comprehensive and collision? These are all important questions that should be answered before making any changes to your existing coverage.
When deciding whether to downgrade 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.
[ Read: How Much Car Insurance Do You Need? ]
Understanding when to downgrade your car insurance
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
First, you need to understand the different types of coverage to determine if you should drop or downgrade your car insurance. The basic auto insurance coverages you’ll find on your policy include:
- Collision: Collision coverage pays to repair your car if you get into an accident or hit a stationary object. Collision coverage is usually an optional coverage.
- Comprehensive: Comprehensive coverage covers everything that collision coverage doesn’t. If a tree falls on your car, you hit a deer, or someone steals your car, comprehensive coverage pays to repair your car. This coverage is usually optional, but if you have a car loan, your lender might require it.
- Liability: Liability coverage includes property damage and bodily injury coverage. If you cause an accident and there are injuries, or damage to someone’s property, liability coverage pays out. Liability coverage is required for all drivers.
- Medical payments: If you or someone in your car is injured in an accident, medical payments coverage will help pay for medical expenses, like x-rays or a trip to the hospital. Medical payments coverage is usually optional, but it is required in certain states.
- Uninsured/underinsured motorist: Uninsured/underinsured motorist coverage protects you if you are in an accident with someone who isn’t insured or doesn’t have enough insurance. This type of coverage may or may not be required in your state.
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. We’ll go over both of these insurance types in the next section—but in a nutshell, 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.
While not technically a type of car insurance, some people choose accident insurance as a supplement to their auto policy. Accident insurance is a type of coverage that pays out when the policyholder is injured, similar to disability insurance.
Is accident insurance worth it? That greatly depends on the individual. If you think an accident is likely in your line of work, then it might be a good route to pursue.
Collision vs. comprehensive coverage
Collision and comprehensive are two separate kinds of car insurance. They each cover different kinds of accidents and damages, so understanding the difference between comprehensive and collision is the first step toward making any decision regarding a change in coverage.
What is collision insurance?
Collision insurance means that damage sustained to your vehicle during the collision with another vehicle is covered. Collision policies differ, and some cover collisions with other obstacles besides vehicles, such as trees or buildings. Some policies may cover repairs, while others cover the replacement cost of the vehicle.
When to drop collision insurance
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 collision insurance as long as you would be able to retain at least half of your savings after paying for a new car or repairs. So when to drop collision insurance largely depends on your emergency fund.
Additionally, you might decide to drop collision insurance if your vehicle’s market value is lower than your deductible. Say you drive a 2000 Toyota Corolla that’s not in great condition, and is worth $850. The deductible on your insurance policy is $1,000.
If you got into an accident and your car sustained $800 in damages, you would cover the cost of repairs since the damage amount is lower than your deductible.
Since collision insurance costs an average of $290 per year, in this example, it may not make sense to pay for collision insurance that probably would not pay out. If your car’s market value is below or very close to your deductible, it would be beneficial to drop collision insurance.
When not to drop collision insurance
If the savings in your bank account is already tight, or even non-existent, it’s probably not a good idea to drop collision insurance from your vehicle. If you would have a hard time covering the cost of repairing or replacing your vehicle in the event of a collision, it’s best to keep the collision insurance in place.
When you ask yourself, “do I need collision insurance?”, the answer should always depend on what will happen to you financially in the event of a collision.
What is comprehensive insurance?
Comprehensive insurance means that damage sustained to your vehicle during a non-collision accident is covered. However, which non-collision accidents are covered differs by policy. Common accidents covered by comprehensive insurance include natural disasters and theft or vandalism.
Based on the name, you might assume that comprehensive insurance covers everything — damages, liabilities, etc. But contrary to popular belief, comprehensive insurance only offers limited coverage, and it’s not the same thing as full coverage insurance.
Comprehensive coverage is optional, meaning it’s not automatically included in minimum coverage car insurance policies. Comprehensive insurance is one part of full coverage car insurance, but the two are not synonymous. As a reminder, full coverage car insurance also includes collision insurance.
When to drop comprehensive insurance
Is your car in the last leg of its life? Downgrading your comprehensive insurance, for the time being, maybe a good option to help you save money. Similar to collision coverage, dropping comprehensive coverage is ideal if your car’s market value is lower than or close to your policy’s deductible. The average cost of comprehensive coverage is $134 per year. But if you’re not going to get a payout from your insurance company after an accident, it’s not worth paying for.
When to not drop comprehensive insurance
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 non-collision damages that occur to your car. In this case, it would be risky to downgrade your comprehensive insurance unless you had enough cash on hand to completely repair or replace your car.
What is the mandatory car insurance coverage?
Basic coverage car insurance usually consists of two parts — bodily injury liability insurance and property damage liability insurance. It does not include collision, comprehensive or medical payments insurance. Minimum coverage insurance simply covers your liabilities as a driver.
Every state has their own requirements for mandatory car insurance coverage. They determine the type of required coverage, and the minimum amount of coverage that each driver must carry. In no-fault states, drivers are also required to carry personal injury protection (PIP) insurance as part of minimum coverage insurance.
Mandatory car insurance coverage is represented in this format — bodily injury coverage per person/bodily injury coverage per accident/personal property liability coverage.
For example, the minimum requirement for drivers in California is 15/30/5. That means drivers must carry a minimum of $15,000 in bodily injury coverage per person, $30,000 in bodily injury coverage per accident and $5,000 in personal property liability coverage.
However, drivers are often recommended to purchase coverage above the minimum requirement in their state. With minimum coverage insurance, there’s no guarantee that you’ll be fully covered after an accident. If you’re underinsured, you’ll have to pay the difference between your coverage limit and the cost of the accident out-of-pocket.
Should you downgrade your insurance?
Unfortunately, there isn’t a clear and straightforward answer to this question. 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!”
However, the ongoing coronavirus pandemic is somewhat changing the norm around car insurance. People aren’t driving as much as they normally do because people are working from home and going out less often. When you spend less time on the road, you face less risk as a driver.
If you’ve been thinking about downgrading your coverage, now is a good time to do it. But remember the decision to downgrade your insurance coverage is personal. Once you start driving more, you might reconsider downgrading your coverage and readjusting your limits.
If you’re considering lowering your coverage, you might think about what your deductible should be.
From our 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. In fact, we often encourage people to have an emergency fund at least 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 pay for the repairs or the replacement yourself out of pocket.
The way I see it, if you have enough emergency funds 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.
For example, take a pickup pickup truck that is more than a decade old and is approaching the 200,000 mile mark. It has a low Blue Book value at this point, and the owner feels uncomfortable driving it any significant distance at all. The family intends to replace it by early next summer.
In this case, it may make sense for the owners to drop down to just liability coverage on the vehicle. This would save several hundred dollars, and if something severe went wrong with it again, the family would 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?
What to consider before dropping full coverage?
If you’re thinking about dropping full coverage insurance, there are a few things you should consider first. Some factors to keep in mind include:
- The cost of coverage: For starters, think about how much you’re currently paying for full coverage car insurance, and compare that rate to the cost of minimum coverage insurance. If it’s not a significant price difference, you might as well keep full coverage insurance, especially if you can afford the monthly payments. Minimum coverage insurance offers significantly less protection than full coverage. If you’re only going to save $20 or so each month, it might not be worth downgrading.
- The age of your car: Newer cars are generally much more expensive to insure, and they also cost a lot more money to fix. If you have a newer vehicle, having full coverage car insurance means you’ll spend less money out-of-pocket repairing your car after an accident. If you drive an older car that you don’t really care about, downgrading your coverage might make sense if you’re already thinking about buying a new one.
- Your car’s value: If you drive a high-value car, like a newer truck or SUV, having full coverage car insurance makes sense. Expensive cars cost more money to fix, especially if they have lots of bells and whistles. If you downgrade to minimum coverage, the cost of repairs would come directly out of your pocket. In that case, it probably would have been cheaper to keep full coverage insurance.
- Your loan: If you are leasing or financing your car, keep in mind that you probably don’t have the option to downgrade coverage. Most lenders require drivers to carry full coverage car insurance so you can still afford your loan payments if your car is damaged. Every loan company has different requirements, but before you downgrade, make sure you know how much insurance you need to have.
- Your car’s replacement cost: If you get into an accident and your car is totaled, your insurance company will use your car’s replacement cost to determine your payout. It’s important to note that your car’s replacement cost is not the same as the price you paid for it. However, you’ll only get reimbursed for the cost of a new car if you have collision coverage. If you downgrade, you’ll be on the hook for buying a new car if yours gets totaled.
How to downgrade your insurance
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.
After downgrading your car insurance, it’s a good idea to look at the next insurance statement to ensure that the downgrade went through correctly and everything looks right.