Tuesday, October 30, 2007

Collision and Comprehensive Car Insurance - When I Consider Dropping Them

Although I am a firm believer in having adequate insurance coverage, I also like to avoid being over insured. One of the insurances I periodically review is collision and comprehensive coverage for our cars.

Since we drive our cars for a long time, at some point they are no longer worth insuring. Liz Pulliam Weston wrote a good article about this in MSN.com titled Dump the insurance on your clunker. At some point, one should start considering stopping insurance for damage to car. Ms. Weston writes that point is when one's annual collision and comprehensive premium is equal to 10% of the car value less the deductible. For example, if one owns a $6000 car with a $500 deductible, one should consider dropping the collision and comprehensive insurance if the cost is more than $550 per year.

For me, 10% may be a little to low, since it will take 10 years of premiums to cover a totalled car in the first year. I personally like to use 20%, since that is a shorter time (5 years) to carry the risk. Also, I like to use an absolute car cost (e.g. $4000) I am willing to "self insure." When my car value drops below that amount, I will drop collision and comprehensive insurance. Finally, I consider our driving record. Luckily, we have only been involved in four car accidents in over forty years of combined driving, in which only one was at fault (by me.) Averaging only one accident every 10 years of driving lowers the probability of us to have an incident in five years.

At this time our, the collision and comprehensive premium for our cars is about 2% of the value of our cars after the deductible, primarily because of good driving records. Also, neither car is close to the threshold value at which I am willing to self insure. Therefore, it appears we will be carrying collision and comprehensive coverage for several more years.

For more on Ideas You Can Use, check back every Tuesday for a new segment.
This is not financial or insurance advice. Please consult a professional advisor.
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