Is there a formula for telling when it is ok to drop collision insurance on your car?
What I mean is when the worth of a car falls below a certain level.
Thanks,
shadowjohn
Usually, when the car is paid off and you own it, collision insurance is no longer cost effective…Basically, it protects the finance company, not you…For sure, by the time it’s book value drops below $5000, you are better off “self insured”
It’s time to drop the insurance when you are prepared to write a check to repair or replace the car if it’s damaged/totaled. At that point you no longer need collision coverage. You need to decide on the dollar value that meets that criterion.
I’ll disagree slightly. There is no formula. I have collision on three of four cars and they are all paid off. It only costs me maybe $2-300 a year. Just depends if you want to take the full hit or not if you wreck it. The other major major consideration is if you rent cars. Even if you use a gold card for rentals, it’ll be a complete hassle dealing with the rental company if you wreck their car. Without collision you will have no coverage through your insurance thus no one to turn the claim over to. You’ll be on your own fighting the card company and the rental company. Who needs having to argue a $20,000 rental car charge plus their lost revenue for a few hundred a year?
Usually, when the car is paid off and you own it.
That doesn’t work if you’re like me and you pay cash for all your vehicles.
I will usually drop collision when the vehicle is no longer worth repairing if I get into a accident…or the value of the vehicle is less then what I can afford to loose if it’s totaled.
Here’s an article on the subject.
http://articles.moneycentral.msn.com/Insurance/InsureYourCar/DumpTheInsuranceOnYourClunker.aspx
Basically if the collision coverage cost is more than 10% of the car’s value the article suggests dropping it.
I’m going to be in this situation soon as I only have a few payments left on my 2000 Blazer. I considered dropping collision once it’s paid off, but I’m probably going to wait until it hits the 100k mark in another year or so. I live in New Jersey and car insurance is expensive.
Ed B,
Good point on the rental issue. You might want to check if one of your credit cards include insurance. Another issue that might be overlooked is that if you have collision and are in an accident, you have the insurance company’s lawyers on retainer.
depends on the cost of the ins. $100 a year to insure a car with a wholesale value of 1500 may not seem like it is worth it until the car is totalled, then that 1500 check looks mighty good.
repairs up to the wholesale value would also be covered if they were needed.
I agree with Mike. Each person’s situation is different, and for those of us who pay cash for our cars, it is simply a matter of figuring out how much we want to pony up for body repairs on an older vehicle.
If collision insurance costs $200. per year, that is a reasonable amount if your car is still worth several thousand dollars. On the other hand, if your car is only worth $1,500., it would be silly to spend that much per year on collision insurance.
Basically, I would suggest estimating how much you are willing to lay out for repairs in the event of a collision (factoring in the book value of the car), and put that information up against the cost of collision insurance.
You have to balance the insurance premium against the wholesale value of the vehicle and the probability that you will make a claim. Decide how many years you average between collision insurance claims and multiply that by the premium. If you go 20 years between claims and the premium is $100 per year, it will cost you $2,000 to protect yourself against a $1,500 loss. Repeat the calculation for comprehensive.
If the cost of repairs reaches 50% to 70% of a vehicle’s wholesale value, an insurance company will declare it a total loss and pay you the wholesale value.
For an older vehicle, whose value is minimal, it makes more sense to put the insurance premium into a money market savings account rather than give it to an insurance company. If you can stay out of trouble until the balance in the account reaches the value of the vehicle, you will be ahead of the game. When the time comes to buy another vehicle, use the account for your down payment.
As long as you have at least one car with collision and comprehensive insurance, you can use that when renting a car. I don’t know how willing credit card companies are to honor their promise to cover rental car damage. (A commercial photographer I know bought a $20,000 video camera with his American Express card because they would insure it against loss or damage on a job.) If you really want to be safe, buy the rental company’s outrageously expensive full insurance coverage.