California Auto Insurance- When To Remove Comprehensive and Collision Coverage

Posted on June 19, 2010

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As your vehicle ages, deciding when to pull the plug and remove comprehensive and collision coverage from your auto insurance can be an agonizing process.  Fortunately, this decision can be greatly simplified with a simple analysis comparing the value of your car to the costs of your insurance.

Lets start with your insurance costs.  Typically, comprehensive and collision coverage make up 30-50% of the total premium on your auto insurance in the Sacramento area and to keep things simple with common terms, we may refer to the combination of both as full coverage.  In very general terms, removing these coverages means if something happens to your car (i.e. you crash into another object, a tree falls on it, it’s stolen etc.), you are responsible for all costs associated with fixing or replacing your car.  While it may intuitively make sense not to purchase full coverage on a vehicle with a value of only a few thousand dollars, a vehicle worth over $30,000 is another story.  So, at what point is the savings from reduced insurance costs worth the increased risk of wrecking your vehicle without coverage?

As a very general rule of thumb, consider removing full coverage when your vehicle is worth less than about 10x the amount you pay for the comprehensive and collision portion of your total insurance premium.    The 10x rule of thumb provides a sensible balance between paying too much for insurance relative to the value received, and being out-of-pocket an exorbitant amount in the event of a total loss.   Here’s an example of the 10x full coverage cost formula at work.  Let’s say your car is worth about $5,000 and your total annual auto insurance premium is $1,200, of which, $600 goes towards your comprehensive and collision coverage.  Using the formula, 10 x $600 = $6,000.  Because the value of your vehicle ($5,000) is worth less than about 10 times your comprehensive and collision premium ($6,000), it may make sense to consider removing these coverage’s.  Just keep in mind, however, removing comprehensive and collision coverage in this instance is just like having a $5,000 deductible, and in the event of a total loss to your vehicle, you could be responsible for the full amount. 

While this ratio provides a simple cost-benefit analysis, it’s by no means full-proof or a one-size-fits-all solution.  The ratio should be adjusted slightly depending on your choice of deductible’s and each person’s particular risk tolerance.  Also, if your car has a lien holder, comprehensive and collision coverage will be required by your lender until it’s paid off.  

Insurance is meant to provide a certain level of comfort against economic uncertainty, so if the thought of being out as much as $5,000 or more will seriously hamper your financial (or emotional) health, consider keeping comprehensive and collision coverage until your vehicle’s value decreases to a level you are more comfortable with.   A great alternative is to establish an emergency fund with as little as $50 per month to cover unexpected expenses as they arise.  An emergency fund can provide peace of mind and improve your financial flexibility to cover the costs of unexpected events, if and when they should occur.

Jeremy Schaedler

El Dorado Hills, California

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Posted in: Auto Insurance