When Should you Drop Full Coverage Car Insurance?

I’m asked this question on a regular basis.  It usually comes up when someone’s paid off a car, their insurance is renewing and they’d like to lower their premium, they’re buying a cash car or they just have an older car.  It’s an excellent question and the answer depends on two factors.  Once those two factors are addressed, then it’s truly up to the client to determine what’s best for them and their financial situation, as well as what risk they’re willing to tolerate.  Full coverage simply means the insurance policy has both collision and comprehensive coverage.  It does not, however, indicate what level of coverage or limits they have on that policy.

All car finance companies, whether it’s a bank, credit union, or the finance division of the car manufacturer, require the borrower maintain full coverage as the car’s insurance.  They want the loan paid off if you’re involved in an accident regardless of who’s at fault.  If you don’t maintain that, they’ll put a forced place policy in effect for you and then charge you the premiums for that (see http://50.87.248.161/~wiseinsu/force-placed-insurance/).  Some lenders will require certain minimum levels of coverage just to make sure they and you are covered.  Once the loan’s paid off, they don’t care what you do.

Whenever a client asks the question about dropping full coverage I ask two questions:

  • What’s the car worth?
  • What would the financial impact be if the car were totaled today?

Some people automatically assume they can drop full coverage the moment the car is paid off.  While that’s true that may not be in their best interest. Let me illustrate with two examples.

  • I talked with a client of mine who lives in the Old Lake Highlands area of Dallas.  We’ll call him Joe (not his real name).  Joe’s currently driving a 1999 7 Series BMW and asked if he should drop full coverage on his car.  It’s paid off and it is 14 years old.
  • I have a new client, a young couple, Ben & Lisa (not their real names) whom I helped with car insurance last month.  They live in Richardson and own two cars: one is a 2008 Honda Accord, the other a 2008 Odyssey.  Both are paid off.

In both instances I started the discussion by working toward what the cars are worth.  In Joe’s instance, we were both in front of our respective computers so we hopped on to two websites, Kelly Blue Book (www.kbb.com) and Edmunds (www.edmunds.com) and looked at the estimated book value of his car.  Here’s what we found:

  • The trade in value started around $2,300 and ran up to $4,500 depending on the condition of the vehicle.
  • The retail value (what he’d buy it for from a dealer or could potentially sell it for to an individual) runs between $3,000 and $6,500 depending on the condition of his car.

Once that was established we delved into how he would be financially impacted if he lost the car today or in the near future.  Joe’s been through some financially thin times the last few years but his business is slowly growing and he’s financially rebuilding.  He determined:

  • It would be a little painful to replace this car if he had to do it today.
  • He has enough in savings where he could swing a down payment on newer car if he had to.

This wasn’t an easy decision.  He had to determine the level of risk he was willing to tolerate.  We removed the collision deductible but kept the comprehensive deductible to cover him if his car is stolen.  The savings added up to about $400 a year.

In Ben and Lisa’s case we looked at the same two web sites and compared that data to what they saw on the lot when they purchased the Odyssey.  In their case:

  • Both cars are worth over $10,000 each.
  • While they still have a healthy balance in savings after paying cash for one of the cars, they’d rather not risk having to tap that again to buy a replacement car and want to avoid payments.

Once we reviewed the answers to the two questions, their decision was simple as well.  They chose to maintain full coverage on both cars for the next two years, but they did raise their collision deductible from $500 to $1,000.    This helped them save about $300 a year.  Had they insisted on dropping collision coverage, I would have assisted them with that even if I disagreed with their decision.  Ultimately, this is the client’s choice and in Ben and Lisa’s case, they could replace either car if they had to.

What would you decide if you were in Ben and Lisa or Joe’s place?  Share your comments, experiences, and questions with us on our Google + or Facebook page or in the comments section of our blog.  I’d love to hear from you!

Thank you!

Ed Wise

Ed Pic

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