I’ve had a couple of conversations over the past two weeks on the topic of when to drop, or not even start with, full coverage car insurance (for more on what is full coverage car insurance vs liability only coverage, see last week’s post https://wiseinsurancegroup.com/full-coverage-vs-liability-car-insurance/). Some believe in dropping full coverage when the vehicle’s loan is paid off while others use the car’s age to make that decision. Let’s look at these two criteria, as well as one more.
Loan Paid Off: If you took out a loan to buy your car, the finance company will insist you have full coverage car insurance to protect their loan. That’s why some car owners consider dropping full coverage once the loan’s paid off. Considering cars and trucks are more expensive and last longer, this may not be the best decision criteria.
The average cost of a new car in 2016 was approximately $34,000 and you have a loan for 5 or 6 years. Even if the resale value of the car has dropped 50%, you still have a vehicle worth about $17,000. If you did drop full coverage at that time, your annual savings may be $500 to $700. Paying that vs losing $17,000 or even $10,000 due to an accident doesn’t makes financial sense unless you’re able to absorb the loss financially.
Vehicle Age: Some people make the decision to drop full coverage once a car hits a certain age, such as 7 years, 10, years, or some other number. If cars were not as well made as they are now, that may be a perfectly good basis. However, I believe making the decision to drop full coverage just because a car or truck is 7 or 10 years old misses one key factor – the value of the car.
For example, Honda Accords made in 2006 and 2007, are currently listing for $7,000 to $8,900 on Auto Trader in the D/FW area depending on the mileage and trim level. Is it worth it to pay a little more to maintain full coverage for a car with a similar value as opposed to losing it in an accident where the vehicle may be totaled?
Vehicle Value: As you’ve already guessed, I believe the best criteria to use when considering dropping full coverage is the vehicle’s value. This will vary by individual. For some it may be when the car’s worth $2,000 or $5,000, but there is a value most vehicles will hit where the cost to keep full coverage doesn’t make sense.
For example, one of my clients purchased an older vehicle for $600. That clearly doesn’t make sense to have full coverage on it so we went with liability coverage. For another prospective client, his vehicle is worth maybe $2,500 to $3,000. For him, it made sense to look at carrying on liability car insurance. In both cases, the risk of losing their cars was worth the savings to have liability only coverage.
What do you think? Share your thoughts, questions, and experiences with me on my Facebook, Google +, and LinkedIn pages. I’d love to hear from you!