When to Drop Collision -- and Risk it All

By Lifestyle and Budget Insurance.com

Thinking about dropping the collision coverage on your trusty but aging jalopy? You're most likely to do so after the car's eighth birthday, according to a new analysis from Insurance.com.

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Based on data from more than half a million car insurance quotes, the study indicates more drivers opt to drop at year eight than any other time. Nine out of 10 owners of seven-year-old vehicles have collision coverage, but only 75% of eight-year owners still do.

"When you drop collision coverage, you're essentially saying that you can do without that car or have a way to replace it without the help of insurance coverage," says Insurance.com Managing Editor Des Toups. (You can see how much coverage people with cars the same age as yours have in the "What Drivers Like You Buy" tool.)

Collision coverage pays to repair or replace your vehicle when you are at fault or the guy who hit you is uninsured. It's required while you're still paying off an auto loan (along with comprehensive, which pays for things like theft and vandalism) and is a good idea for some years after that.

How many years? That depends. We asked some people who think about money a lot how they decided to keep collision or drop it.

The 10% Rule

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Personal finance writer Kathy Kristof suggests weighing coverage vs. replacement costs. A good rule is 10%: If collision coverage costs $200 a year on a $2,000 car, you should consider dropping it and banking the premium toward your next vehicle purchase. (You can find the premium for your collision coverage itemized on the declarations page of your last renewal notice.)

Her own household's two vehicles are both 12 years old but still worth between $5,000 and $7,000 each. Collision insurance is relatively cheap, so she carries it.

"I would rather not have to eat that loss if they were totaled (just) to save less than $100 a year on insurance costs," Kristof says.

Some cars hold their value for a long time. Andrew Schrage of Money Crashers is insuring a 16-year-old car -- one with 200,000 miles on it. But it's a Lexus, not a 1998 Chevy Cavalier.

"The Blue Book value of the car is still high enough that paying out the (collision) premium is a good investment," Schrage says. From time to time he does a cost analysis to make sure coverage is still worth it.

However, age and infirmity sometimes make it pointless to insure your hoopty against hurt. J. Money, who blogs at Budgets Are Sexy, drives a 1993 Cadillac DeVille that's been hit by a trio of other drivers in the past year.

All three insurance companies considered the car "totaled" and wrote him checks for the Blue Book value (about $2,000 in all). The blogger dropped collision coverage, "since I don't care about its looks and condition anymore." This saves him about $20 a month, he says.

The Paycheck-to-Paycheck Tax

Not all drivers can afford to drop collision once they meet the 10% guideline noted above. Continued coverage might be necessary (albeit frustrating) for those living from paycheck to paycheck.

Suppose you swerved to avoid a deer and wound up hitting a tree instead. How would you get to work after that? Sure, the car might be worth only $1,500, which means just a grand after a $500 deductible. But that's at least a start toward replacement wheels; drop the coverage and you'll get nothing.

The premiums you pay over the years could wind up equaling or exceeding what you'd get in the event of an accident. But if you can't afford to replace the vehicle you probably shouldn't drop collision right away. You should, however, find a way to start saving even a small amount each month toward the inevitable replacement.

(And one more tip: Almost all insurance companies will insist that you buy comprehensive coverage along with collision. But you usually can buy comprehensive all by itself, Toups says.)

Worth the Savings?

A driver's personal risk tolerance also plays an important role in deciding what insurance to carry. Personal finance author Gerri Detweiler chose "some of the highest limits" for her 2012 Kia Forte's insurance and bought an umbrella policy to boot. Given all that, "the relatively small amount of money" that collision costs is worth it to her.

"Even the littlest fender-bender can result in expensive repairs," Detweiler says.

At the other extreme are people who don't feel at risk, i.e., they're such good drivers that coverage is unnecessary. However, wet or icy conditions can send even the most cautious motorist into the nearest guardrail. Without collision, you won't get squat toward repairing or replacing your vehicle.

The decision to keep or ditch collision is clearly very personal. Don't let others push you in either direction. Instead, take a clear-eyed look at your finances and run the numbers, asking yourself: If that car in the driveway disappeared and you were uninsured, what would you do?

Crunch the Numbers on Several Options

There's no better time to shop around for a better deal on car insurance. The company that gave you the best price on full coverage may not be the cheapest when you drop to liability only; you may even save enough so that keeping collision seems like a viable option.

Run other scenarios as well, like keeping collision and increasing your deductible. The math will look very different depending on where you live and what kind of car you drive.

For example, for a driver in Oakland, California, with a 2006 Chevrolet Aveo LT worth about $3,500, the additional cost of collision and comprehensive is at least $720 a year even with a $1,000 deductible, assuming the driver shopped around and chose the cheapest quotes available. The maximum payout in return for that $ 720 would be $2,500.

Coverage on 2006 Chevrolet Aveo

  • 50/100/50 liability only: $616
  • Comp/collision, $1,000 deductible: $1,336
  • Comp/collision, $500 deductible: $1,484

The math looks better for keeping collision if the car is a 2006 Acura TSX worth $9,500; here you'd pay a minimum of $1,064 more (with a $1,000 deductible) against a payout of $8,500.

Coverage on 2006 Acura TSX

  • 50/100/50 liability only: $674
  • Comp/collision, $1,000 deductible: $1,738
  • Comp/collision, $500 deductible: $2,166

But if you're doing your calculations from Canton, Ohio, the cost of protecting yourself against a $2,500 or $3,000 loss on that Aveo is much more reasonable:

Coverage on 2006 Chevrolet Aveo

  • 50/100/50 liability only: $720
  • Comp/collision, $1,000 deductible: $954
  • Comp/collision, $500 deductible: $1,096

Your agent should be happy to answer questions, or you can run quotes at insurance company websites, or you can use Insurance.com's quote comparison tool to see side-by-side rates in under 10 minutes.

If you can truly afford to drop the coverage, do so. Then immediately set up an automatic debit of the annual collision premium to create a someday fund for a new (or new to you) vehicle. That may be necessary sooner than you think: Even the best drivers in the world can't see black ice until it's too late.

Donna Freedman is a staff writer for Money Talks News, and blogs about midlife and money at DonnaFreedman.com.

The original article can be found at Insurance.com:
When to drop collision coverage -- and risk it all