When you’re looking for auto insurance savings tips online, you’ll see one tip that gets repeated frequently: if you own an older car, then you should reduce your insurance coverage.
Many people know about this tip, but not everybody knows why or how to reduce insurance coverage on an older car. Today, we’re explaining why doing so can help you save – literally – thousands of dollars per year.
You Don’t Legally Need Comprehensive or Collision Insurance on Your Vehicle
When we talk about “car insurance”, we’re not talking about one single insurance policy. We’re talking about a group of five or so different insurance policies.
As a legal minimum, all but one state in America requires you to have at least liability insurance. If you don’t have liability insurance, then it’s illegal for you to drive on the roads in that state.
Interestingly, New Hampshire is the only state that doesn’t require liability insurance. However, they do require drivers to prove they have sufficient funds to cover damage caused by an at-fault collision. Effectively, that means most New Hampshire drivers require liability insurance.
Liability insurance means that you’re protected against any costs or damage you may inflict on other people and property during the course of your driving – including bodily harm and property damage.
Liability insurance is the legal minimum. It’s also relatively cheap.
However, most of America’s drivers don’t have the legal minimum. Most drivers have comprehensive insurance and collision insurance:
Collision Insurance: Collision coverage covers damage to your car when your car hits (or is hit by) another object.
Comprehensive Insurance: Comprehensive coverage covers losses related to incidents caused by your collision, like flooding or property damage, etc.
You May Be Paying More for your Insurance Than your Vehicle is Really Worth
Here’s my point with all of this information: if you drive an older vehicle, then you may be paying more for your insurance policy than your car is truly worth.
That means you’re paying more for your insurance policy than you would likely receive in the event of a collision.
In other words, you can save a considerable amount of money by dropping collision and comprehensive coverage from your insurance policy. It’s not legally required in any state.
By dropping comprehensive and collision insurance from your plan, you can save hundreds of dollars per year. Some people will even save thousands.
Don’t Immediately Spend the Extra Money You Save
So you just saved $100 per month on your car insurance plan. That’s great! You may be tempted to spend that money.
However, that’s not really a good idea. If you’re smart financially, then you’ll put that money in an emergency fund. If you do get into a collision, then you may need to pay for vehicle repairs out-of-pocket (or buy a new vehicle).
Basically, an emergency fund acts as your own insurance plan. The best part about this plan is that you get to hold onto your money. Instead of giving your money to your insurance company every year and hoping nothing happens, you can hold onto your money. In the best case scenario, that money is yours to keep when you retire your car from the road in the future.
When Should You Cut Collision and Comprehensive Insurance from an Older Vehicle?
This is a tricky question. There isn’t some specific vehicle’s age or mileage when you should absolutely cut comprehensive and collision insurance. There isn’t some vehicle value-to-policy cost ratio you need to check.
However, there are some general rules you can follow when deciding whether or not to remove collision and comprehensive insurance from an older vehicle.
If your vehicle suddenly needed significant repairs, would you decide to replace the vehicle?
Ask yourself this question. If your vehicle needs repairs, would that be the “straw that breaks the camel’s back”, so to speak? Would you look at the estimated repair bill, look at the value of your vehicle, and then just say “forget it”? If the answer is yes, then it may be time to drop collision and comprehensive insurance from your plan.
Check the Blue Book value and see how much your vehicle is worth
Use Blue Book or a local vehicle resale website to determine the value of your vehicle. This will help you answer the question above. The internet has made it very easy to determine the value of your vehicle – no matter how old or unique your vehicle may be, it’s unlikely to be the only vehicle in the world in that situation. Check the value of your vehicle, then use that number to determine if it’s really worth the price of your insurance policy.
Classic Cars Are an Exception
There’s one important exception for everything we’ve listed above: insurance companies offer something called classic car insurance. Older, collectible vehicles may qualify for classic car insurance – but only if they’re used as your secondary vehicle. A 1990 Honda Civic is not a classic car, but a 1957 Chevrolet Bel-Air would be a classic car. Don’t immediately remove collision or comprehensive insurance from your vehicle just because it’s 60 years old!
By following the tips above, you can decide whether or not it’s smart to reduce insurance coverage on an older vehicle.