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Does my 10-year-old car need full coverage?
I paid off my 2005 Ford Focus in November 2013. I am still carrying full coverage, but I have been told that’s a waste of money. Should I go to liability only?
Our data show that 40 percent of drivers who own 2005 model cars are buying comprehensive and collision coverage – or what’s known as full coverage.
The overriding question is whether you can afford to buy another car if this one were stolen or destroyed. If you don’t have the savings to buy another car or the income to make monthly payments, you’re taking a much bigger chance when you drop comp and collision.
Some parts of New Jersey, your home state, are vulnerable to storms. Some areas are thick with roaming deer and others with car thieves. You’d be foolish to tempt fate if you can’t afford to replace your ride. Insurance is a way to make an unmanageable loss manageable.
But if you can manage such a loss, and this is purely a money-saving exercise, do the math.
For example, a 25-year-old woman with a clean driving record living in Stirling, N.J., would pay about $1,302 a year for “full coverage” (50/100/50 liability, uninsured motorist, personal injury protection and comprehensive and collision coverage with a $500 deductible) on a 2005 Ford Focus ZX4.
Dropping comprehensive and collision, she would pay about $806 a year – a savings of $496 a year.
The car is worth $3,702 as a trade-in and $5,234 in a private-party sale, according to Kelley Blue Book. Let’s use the midpoint, $4,450, as the “actual cash value” an insurance company would pay.
If her car were totaled tomorrow and she still carried full coverage, she would get a check for $3,950 – the actual cash value of the car minus her $500 deductible.
In other words, she is paying $496 a year to protect herself against a $3,950 loss. Saving nearly $500 a year now could be a great start toward paying off other bills or a newer car.
A friendly agent or a single-form car insurance comparison tool like Insurance.com’s can make test-driving decisions on your insurance coverage much, much easier.
Sometimes the decision is clearer
Of course, the value of the car drops with each passing year, and so do the insurance premiums.
Say the Ford Focus mentioned above were a 2002 model, worth about $1,700 actual cash value. Minus a $500 deductible, the maximum payout would be $1,200.
Full coverage on the car would be $1,108 a year. Minus comp and collision, the bill would be $726.
That’s $382 a year to insure against a potential $1,200 loss; most drivers would choose to accept the risk and bank the premium because they would be unlikely to find a reliable replacement with that $1,200.
There are rules of thumb, too. Financial guru Liz Pulliam Weston says dropping coverage when the premiums reach 10 percent or more of the potential payout makes sense. The example above reaches that threshold.
CBS MoneyWatch columnist Kathy Kristof puts a flat dollar value on it: the price of a running car, about $2,000. When your car is worth less than that, drop the coverage.
We have our own rules of thumb on insuring any car:
- When the car is new and financed, you have to have insurance. Keep your deductible manageable.
- When the car is paid off, raise your deductible to match your available savings.
- When you would no longer put additional money for a major mechanical repair into the car – for a new transmission or engine – seriously consider dropping comprehensive and collision.
Bear in mind that some car owners with models much older than yours maintain full coverage. About 18 percent of 1985 model year vehicle owners seeking quotes through Insurance.com’s rate-comparison engine are looking for comprehensive and collision.
8 minutes. $288. How’s that for fast savings?
I've long believed that only amateurs pay retail, so Insurance.com's recent survey about comparison shopping got my attention. Interviews with 2,000 men and women about their deal-seeking behaviors were analyzed and then framed in terms of value per minute.
Not surprisingly, the "car insurance" category left others in the dust: $54 per minute, based on the 10 minutes it takes to use Insurance.com's shopping tool and the $540 average savings. The second-best category, cellphone plans, saved $1.86 per minute.
I wrote about the survey on my personal website, recounting the happy outcome when "get a car insurance quote" made it to the top of my to-do list: I saved almost $700 a year. You might save more, or less, or not at all. But getting a periodic insurance quote comparison is simply smart.
For example, since my New Jersey relatives often sigh and moan over the Garden State's awful insurance rates, I decided to feed a family member's info into the comparison tool. About eight minutes later I had quotes that would save him up to $288 per year on his car alone.
Show me another frugal hack that could save you that kind of money in eight minutes. More to the point, this is money that he'd continue to save instead of overpaying for insurance year after year. What could an extra $288 a year do to his bottom line? Or yours?
Learn from my mistakes
In my late 40s I fled an abusive marriage and went broke and into credit-card debt during the protracted divorce. At the same time I decided to return to college (grants and scholarships only, no loans) to obtain the degree I never got as a young woman.
Nickel-and-diming doesn't begin to describe how I stretched such funds as I had. In part that was because I didn't have many large items to cut: no cellphone, no cable (in fact, no TV), no expensive habits (wine, shopping, organic food). No new computer, either, even after my part-time writing career burgeoned; I wrote freelance assignments on an old desktop, and printed out my college papers and undergraduate thesis on an old HP obtained after a friend cleared out her late mother's apartment.
The single biggest savings opportunity - car insurance - simply wasn't on my radar. Even after an MSN Money reader suggested I was paying too much, I was so focused on babysitting, taking surveys for cash, mystery shopping and trading in ink-toner cartridges that I never made time to look for rate quotes.
I couldn't see the frugal forest for the teeny-savings trees. When I finally did use an insurance comparison tool, I learned I'd been overpaying by almost $700 a year for five years. Typing that sentence made me angry with myself all over again: How many surveys would I have had to take to earn $3,500?
Prioritize your savings
It's just smart consumerism to give your budget a checkup every now and then. A commenter at my personal website will regularly choose a bill and "see if I can haggle and get it down." She'll get the $159 cable service dropped to $121 for three to six months at a time, or let Sirius Radio expire because she knows that customer service will offer a "please come back!" offer of $4 a month, good for up to a year.
So even if you think you've already got a pretty sweet deal on auto insurance, look for a new quote anyway. Maybe something in your life has changed - marital status, credit score, the length of your commute - and you're now eligible for discounts. You won't know unless you ask.
As for attacking life's other expenses, prioritize the ones with the biggest potential savings. Keep your car a few extra years, and research like an OCD boss when it's time to get wheels. Shop for better prices on cable, Internet and health insurance, too.
Fire the cleaning lady and/or the lawn guy. Make lunches or dinners out an every-other-week treat instead of a near-daily habit. (Think that last one doesn't matter? Track the cost of all meals out for a month; you'll likely wind up wanting to kick your own behind, repeatedly.)
Full disclosure: I still wash and re-use Ziploc bags. But I now recognize that small frugal hacks don't have nearly as big a budgetary impact as, say, the fact that we are a one-car household. Having to insure, repair and fuel just one vehicle (a long-since-paid-for 1999 Subaru) means thousands of dollars a year in savings. By comparison, I recently recycled 10 pounds of cans I picked up on my daily walks - and made $3.50.
(Donna Freedman is a staff writer for Money Talks News, and blogs about midlife and money at DonnaFreedman.com.)
Car hit, then stolen: Can I make a claim for the damage?
Another driver hit my car and said he wasn't at fault. Seven months later, his insurance company finally admitted that he was in the wrong. They won't pay me out until they see the car -- which is impossible because the car has been stolen. Can you please give me some advice?
There's bad luck, and then there's whatever you are having.
A repair estimate made after the accident might work as proof of loss, or photos of the damage, or a police report that might include photos.
But without some kind of record of the damage, the other driver's insurance company has nothing to base a settlement amount on.
If you had comprehensive coverage on your car and your own insurance company paid you for your car after it was stolen, the settlement you received might have been reduced due to the damage from the earlier accident. You would need to ask your insurer to write a letter saying it had deducted a certain amount from the actual cash value payout to account for the accident.
Otherwise your only other option might be the courts.
Your story is one of the best reasons I've heard to take photos of a damaged car as soon as it is practical and safe to do so. (See "7 things you must do withing 30 minutes of a car accident.")
Question of the Week: Driving Grandma's car
I’m going to drive my grandma’s car for school. What type of insurance should I get?
Insurance follows the car, so your grandmother’s policy should cover anyone who has her permission to drive the car.
Even if you had an insurance policy of your own, your grandmother’s policy would pay first if you crash her car.
If you hit someone while driving her car, her liability insurance would pay for the cost of any injuries to the other driver or repairs to their car. The costs of repairing your grandmother’s car would be paid by collision coverage, if she has it, or out of pocket if she doesn’t. You’ll be raking leaves until you’re 30 to pay her back.
So you don’t have to buy a policy of your own. That’s the good news.
The bad news is that if you routinely drive your grandmother’s car, you may need to be added to her policy as a listed driver – meaning her rate calculations would include you. Young drivers have many, many times more accidents than grandmas do, so it’s likely her rates would rise.
Your grandmother might try comparing car insurance quotes with you as a listed driver and without, or she can simply call her current insurer and describe the situation. Better to find out ahead of time rather than have a claim rejected.