I’m often asked by clients at what point it makes sense to drop Collision and Comprehensive coverage off their car or truck as it gets older. Some people have heard that once a vehicle reaches the “magic age” of ten years old, these coverages should be dropped. Other people assume that as soon as they pay off their loan, perhaps it is time to drop down to “Liability only”.
Personally, I don’t think hard and fast rules like these make a lot of sense. Because if you’re asking at what point you should stop paying for physical damage coverage on your vehicle, then what you are really asking is at what point you should start self-insuring your vehicle.
In other words, if you drop your vehicle to “Liability only” and then a loss occurs, you may lose the entire value of the vehicle and may have to come up with a way to replace it out of your own pocket. So, by my way of thinking, the lower the value of the vehicle, the less you are risking if you self-insure it.
Financial advisors talk a lot about “risk tolerance” when it comes to choosing investments. I think the same thing applies to choosing a level of insurance coverage. How much risk are you willing to tolerate in order to save some premium? Would you gladly risk the loss of a $8000 car to save $20 a month in insurance cost? Or maybe you fall closer to the other extreme and would rather pay another $80 a month to avoid the potential loss of a $2500 vehicle?
As you can see, the question of risk tolerance is partly individual preference and another part about your financial position at the time. How well can you afford the higher monthly insurance payment? And also, how well can you afford to replace your vehicle if need be?
So when a client asks me for advice regarding dropping coverage on their aging vehicle, I first ask them if they know what it is worth. That’s step 1 - quantifying your risk. Step 2 is to quantify your savings; so I quote how much premium they would save if they did reduce coverage. Step 3 is to compare the risk with the savings and make a decision on what you feel comfortable with.
As discussed above, risk tolerance will vary from person to person, but I’d say that many of my clients will reduce coverage on a vehicle somewhere in the $2000 - $5000 value range. Again, this is a personal decision, as you will have to live with the consequences.
Once their vehicle value drops to four digits and their loan is paid off, some people will play this half way and drop their Collision but keep Comprehensive coverage. The reasoning often goes like this: “I’m a safe driver, and I don’t think I will cause an accident. The most likely way my vehicle would be damaged is if I hit a deer or a rock breaks my windshield.” This logic may have some merit, especially here in the north country where deer hits and broken windshields are our most frequent auto insurance claims. However, bear in mind that you may be the safest driver in the world, but that doesn’t mean that your vehicle won’t be hit while parked at the store or that you won’t be rear-ended at a stoplight by an uninsured driver. In both of these cases, it’s fairly likely that you will be out of luck if you weren’t carrying Collision coverage on your vehicle.
One factor worth noting is that as your vehicle value drops lower and lower, the likelihood increases of it being totaled out after even a minor mishap. If you are fully insuring a $1500 car, you need to be bear in mind that there is hardly any claim that you could have (except maybe glass damage) that is not going to total it out. If you are carrying a $500 deductible, this means that the most you could get for a claim on your $1500 car would be around $1000. If you were carrying a $1000 deductible on your $1500 car, your max payout would be $500 or so! For this reason, it may not make a lot of sense to fully insure a vehicle once the value drops below $2000.
So, about that “magic age” at which a vehicle should be dropped to “Liability only”. Is it eight years old? Ten years old? Maybe even twelve years old? To answer that question, let’s work frontwards, not backwards. I think we can all agree that there is a huge difference in value between a ten-year old four-wheel-drive pickup and a ten-year old 2 door coupe. So answer this: At what age will your vehicle’s value be low enough to make you comfortable risking its loss? Once you answer this question for yourself, you will know your vehicle’s “magic age”.
About the Author
Agent Ken Cobb
Ken is the owner and principal agent at Pine Country Insurance in Bemidji. Active in the insurance industry since 2000,Ken uses his years of personal insurance knowledge and experience to assist clients in customizing insurance coverage to fit their needs. Ken considers himself a "farmer" rather than a "hunter"; rather than focusing on writing a lot of new policies as quickly as possible, he works on cultivating long term relationships based on trust with his clients. When writing new policies and meeting for annual reviews, Ken spends time with his clients explaining and helping them understand their insurance, and he is also pleased to share his knowledge with his blogging audience as well.
Ken Cobb is owner of Pine Country Insurance and has been active in the insurance industry for over 15 years. Meet Ken.
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