Are comprehensive and collision insurance required by law?
Why would you even consider getting comprehensive and collision insurance?
Deductibles
Results
Observations
Consensus
Have you ever thought about when to drop collision and comprehensive coverage from your auto insurance policy? Without a doubt, auto insurance is essential when your vehicle is relatively new, valuable, and you need financial protection. But what happens when your car gets older, its value decreases, and you’ve put on hundreds of thousands of miles? Is there a point where full coverage no longer makes financial sense?
This dilemma comes up every time I renew my auto insurance. I drive over 60 miles each way to and from work every day, so I usually buy inexpensive used cars and drive them until their mileage is high. Conventional advice suggests dropping full coverage if its cost exceeds 10% of the replacement value of your car. So, if your car’s worth $5,000, your insurance should cost no more than $500 a year.
But does this 10% rule always work? Suppose you drop your coverage and then get into an accident right away? What’s the actual savings, and how long would you need to stay accident-free for it to be worth it financially? Is there a break-even point where the cost of comprehensive and collision coverage just barely covers your car’s value? Or could that money be better spent paying off debt, saving for retirement, or building a rainy day fund?
In this post, I want to explore these options, crunch some numbers, and decide if keeping comprehensive and collision coverage really outweighs the risks. But first, let’s define comprehensive and collision coverage.
Collision insurance covers damage to your vehicle in an accident with another vehicle, like a typical car crash. Comprehensive insurance covers non-collision-related damage, such as a broken windshield from a flying rock or hail. Generally, state laws don’t require you to have coverage that protects the physical appearance of your car. However, if you have an auto loan, the lender might require full coverage to protect their asset.
Legally, you must be financially responsible for any injuries or damage you cause while driving. This is why you have Bodily Injury Liability and Property Damage Liability, with minimum amounts varying by state. The goal of insurance is to minimize your financial risk and protect your asset from unfortunate events.
Imagine buying a new $40,000 SUV and getting into an accident right after leaving the dealership. Even if no one is hurt, without insurance, you’d be responsible for repair costs running into tens of thousands of dollars. Insurance helps mitigate that risk by paying a comparatively small sum so the provider covers those expenses.
The cost of collision and comprehensive coverage will depend on your deductible, which is the amount you pay before the insurance company pays any benefits. For example, if you have $5,000 in damages and a $500 deductible, you pay the first $500 and the insurance company covers the remaining $4,500. Most people choose deductibles between $500 and $1,000 based on factors like price, comfort level, and accident history.
To decide if keeping collision and comprehensive coverage makes sense, I called my insurance provider for figures on a few options. Here’s what I found, considering extreme scenarios:
1. If I totaled my car tomorrow, a $500 deductible would offer the greatest value, whereas dropping coverage would be the least beneficial.
2. If I stay accident-free for at least 16 months, dropping coverage would start to yield a better return than a $1,000 deductible.
3. If I stay accident-free for at least 22 months, dropping coverage would surpass the savings from a $500 deductible.
4. After 30 months, a $1,000 deductible breaks even, making it sensible to drop coverage since there’d be no benefit.
5. After 36 months, a $500 deductible breaks even, again suggesting it’s time to drop coverage.
Though I could save money over time, the benefit wouldn’t outweigh the risk until several months down the road. A higher deductible might be the better middle-ground option.
Now, let’s rethink this scenario assuming both parties in an accident have insurance:
1. With the other party covering my deductible, the $500 deductible never offers a greater benefit than the $1,000 deductible.
2. I’d need to stay accident-free for at least 30 months for dropping coverage to surpass the $500 deductible.
3. I’d need to stay accident-free for at least 34 months for dropping coverage to surpass the $1,000 deductible.
With the deductible covered by the other party, it takes longer for the savings of having no coverage to outweigh the risks. The lower cost, higher deductible option becomes more appealing.
Ultimately, deciding whether to drop collision and comprehensive coverage boils down to one thing: Do you think you’ll get into an accident? Remember, insurance isn’t an investment; it’s a payment for protection from unwanted risk. Assess your likelihood of having an accident—either by your own fault or someone else’s.
Accidents can happen anytime, not just when it’s your fault. For instance, I’ve been in accidents where someone else was at fault but either had no insurance or circumstances were beyond my control.
Given my daily long commute and the varied weather, it’s likely I’ll face another accident. Thus, it makes sense for me to keep collision and comprehensive coverage, opting for a higher deductible to lower costs.
However, your situation may differ. If you don’t commute or drive under stable weather conditions, dropping collision and comprehensive coverage might make sense for you. Remember, insurance is a gamble; it’s crucial to consider the risks and play it safe by choosing a conservative option.
