Consider Reducing Car Insurance Coverage as Your Vehicle Ages

Emmet Pierce

When your car is new and its value is at its highest, it makes sense to buy broad auto insurance coverage to protect your investment, but as your vehicle ages your coverage needs may change.

It’s important to carry enough coverage to pay your costs if a late model car needs to be repaired or replaced. However, it never makes sense to carry more car insurance than you truly need, said Carole Walker, executive director of the Rocky Mountain Insurance Information Association.

Most drivers have liability coverage, which pays for the damage or injuries you cause to others. Many car owners also purchase optional collision and comprehensive policies for added peace of mind, said Amy Bach, executive director of the United Policyholders insurance consumer group.

Collision coverage pays to repair or replace your car no matter who is at fault in an accident. Comprehensive coverage pays for losses not caused by collisions, up to your policy limits. These losses may include: fire, theft, vandalism, weather-related damage, damage caused by hitting animals on the highway, and glass damage.

The average yearly price of a comprehensive policy is about $134 while the average price of a collision on policy is about $290 per year, according to the Insurance Information Institute (III). When setting your price, insurance underwriters consider such factors as your age, your driving experience, the amount of driving you do each year, and where you live.

If you live in a high-population area with heavy traffic, you may have to pay more than drivers in rural areas, since greater populations typically mean more traffic accidents.

Consumer Reports notes that deductibles for collision and comprehensive coverage can run from zero to $1,000. While taking a high insurance deductible can reduce your annual rates, be sure to have the cash on hand in case you need to file a policy claim.

If you buy collision and comprehensive coverage for a car that is 10 years old or older, you may be paying too much for car insurance. It’s important to weigh what you are paying in premiums against what you are likely to get back from your insurance if your car is damaged, said Walker.

“If you drop comprehensive and collision and on an older vehicle it can be a smart choice,” she said. “You will save on premiums, but to understand that you will have to pay for repairs out of pocket, if you need to file a claim.”

Many consumers choose to err on the side of caution by keeping collision and comprehensive coverage for older cars, said Bach. This may be the right choice for you, but remember that no matter how much coverage you have, your insurer will not pay a claim for more than what your vehicle is worth. Typically, the older your car is, the lower its market value. So when involved in an accident, insurance carriers are more likely to consider an older car to be a total loss as repair costs often approach or surpass the market value of older cars.

According to Kiplinger, which publishes financial advice, insurers tend to declare a car to be a total loss if the cost of repair reaches 75 to 80 percent of the car’s retail value. If your car is totaled, it will be sent to a salvage yard and you will receive a check for its market value, less your deductible.

Take the 10 Percent Test

Kelley Blue Book says if your annual cost for comprehensive and collision insurance exceeds 10 percent of the value of your car, you should consider dropping the coverage. If that’s the case, there’s a good chance that any insurance payout you receive following an accident will be less than the amount you paid for the added coverage.

Using the 10 percent rule, if your car is worth $4,000 and your comprehensive and collision premiums cost more than $400 a year, it may be time to drop the coverage.

If your car is totaled and you feel that your insurer undervalued your vehicle, you can negotiate by providing examples of what people are paying for similar cars in your community.

When you’re paying off an auto loan, you may be required to carry collision and comprehensive coverage, in addition to liability insurance. That is because lenders need to protect their financial interest in your vehicle until your loan is repaid. Once you own your car free and clear, you can decide whether cost of collision and comprehensive is worthwhile.

Calculate Your Car Replacement Cost

Before cutting back on coverage for your older car, you should take time to figure out how much it would cost to repair or replace it if you had to cover the amount out of pocket, said Walker. It may make sense for you to keep full coverage if your older car has maintained a high resale value.

Repairing older cars typically is less costly than newer vehicles, because they use less advanced technology. Replacement parts for older cars typically are less costly also.

Sometimes drivers owe a lender more than the actual value of their vehicle. If this is the case with your car, consider buying “gap insurance.” If your car is totaled, this policy will pay the difference between the actual cash value of your car and what you owe the lender.

“Anytime you have a lien, understand the fact that the insurance company will pay you what the car is worth, but your car loan may be more than that,” said Walker.

You can research how much your car is worth by contacting local auto dealers. Another way is by consulting auto buyer guides, such as the National Automobile Dealers Association or Kelley Blue Book.

Determine Whether Your Older Car is a Classic

Most cars lose value as they age, but in some cases older cars attain a greater value by achieving classic car status. When that happens, drivers often can find discounts by buying classic car insurance.

Cars generally must be at least 25 years old to be considered classics. You typically can find the best price on classic car insurance if you work with an agent who specializes in such policies, said Bach.

Insurance companies often give classic car owners a price break because their cars typically are driven less often than most vehicles. Classic car owners often pamper their vehicles, saving them for special occasions and using less valued cars for daily work commutes. That means classics are less likely to be damaged or totaled in accidents. Because they usually are kept in garages, classics are less likely to be stolen.

Before you buy insurance for a classic car, you may wish to have its value appraised so your policy will accurately reflect its worth. This is especially important if you have made improvements that have increased its value.

READ MORE: Is It Time to Upgrade Your Ride?

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