There are lots of options when it comes to auto insurance. So what do you choose - especially when your car is getting older?
Auto insurance coverage relating to bodily harm (liability, no fault, medical payment, etc.) should not be chosen based on the age or type of your vehicle, as your life and others’ have the same value no matter what car you drive.
The same does not hold true for coverage relating to vehicle damage, i.e. comprehensive and collision coverage. Generally, these forms of auto insurance become less cost-effective as your vehicle ages and its value decreases (excluding classic cars, of course). Eventually, it just isn’t worth it to keep buying collision and comprehensive coverage for an aging car.
So, how do you know when to stop purchasing comprehensive and collision for your vehicle? Ideally, you would make this decision based on hard cold financial logic, rather than intuition or simple disgust with your old clunker. So let’s take a look at the numbers.
Let’s say, for the sake of argument, that you know for a fact you’re going to total your car within a year. You might say that it would be perfectly fair for you to pay exactly your car’s value in collision/comprehensive premiums, because that’s what you’ll get back from your auto insurance company.
Now, let’s say you have a 10% chance of getting into an accident this year. By the same logic, that means you should pay roughly 10% of your car’s value in collision premiums. (Statistics regarding non-collision damage – covered by “comprehensive” insurance – are harder to come by, but in general, you can assume that if your car isn’t worthy of collision, it’s not worthy of comprehensive, either.)
So, here’s how you can calculate whether or not it is worth it to continue this coverage:
[Your chance of getting in an accident] x [blue book value when you should stop paying for insurance] = [yearly collision premiums]
But what in fact is your chance of getting in an accident over the course of a year? According to recent U.S. Census Bureau data, about 9% of drivers get in an accident each year. So, you can use 9% as your likelihood of crashing. Of course, other factors affect this: how much you drive, where you drive, your age… For example, 32% of 16-year-olds crash in a year (yikes), whereas just 4% of folks over 75 get in a smash. But, for the sake of simplicity, the 9% number works for our equation.
Now, you can supply the retail/private party blue book value of your car, run the equation, and check the result against your actual collision premiums in your auto insurance policy. By way of demonstration, we’ll use national averages in the equation. On average, collision coverage in the U.S. totals $309 per vehicle (again, this will vary widely depending on many factors). So, on average, the equation looks like this:
9% x [blue book value when you should stop] = $309
So, doing the math, the result is:
9% x $3433 = $309
So, if you are an exactly average driver with exactly average premiums, you should stop purchasing collision and comprehensive coverage on your auto insurance policy once your car’s blue book value is less than $3433.
Be sure to plug in your real insurance numbers, and check the actual blue book value of your car, before deciding to pull the plug on any aspect of your auto insurance coverage. And as far as accidents are concerned, try to beat the odds…