I’d like to expand one of the points I made in my previous post. As of right now, I have only owned one car. Perhaps as a result of that, I never really thought about how much I was paying for car insurance.
Update: I am now leasing a car, so technically this no longer applies to me. But, of course, the advice still relevant to those who have full coverage.
Well, I decided to look into this very topic and came to the conclusion that I was overpaying. So I dropped comprehensive and collision coverage in favor of just liability. There is a rule of thumb that many articles out there mention, such as this one from Kelley Blue Book. The basic principle is that if the total cost of your monthly premiums is more than 10% of the value of your car, you should consider dropping at least some of your coverage. You may know that KBB also specializes in car value, and has a calculator to tell give you a good idea of your car’s actual value.
One Size Does Not Fit All
You may have noticed I italicized the word consider in the previous paragraph, and I did so intentionally – because, of course, what is a good idea for me may not be a good idea for you. Let me give you a run-down of the things that played a role in my decision:
My car was already paid off. This one is more than just a rule of thumb – there is a very good chance the lien holder will not even allow you to forego full coverage if you are still making payments – and why would they? If your car is totaled, what incentive do you have to keep paying for it? So, for many people, this could be a “hard stop.”
My car’s value was low. Indeed, the “10% rule” was not in my favor. I’m almost embarrassed to say it, but at the point of dropping full coverage, my annual premium was roughly 50% of my car’s value. Ugh.
I have no debt. You may have already pieced this one together, given that I said my student loans are already paid off and so is my car. I also rent an apartment rather than own. It’s very important to pay down debts given that they almost always come with an interest charge. Since I didn’t have any debt, that was not a concern.
I’m not struggling to make ends meet. As I said earlier, I’m definitely not rich, but I’m not struggling to get by, either. So it wouldn’t be catastrophic if I had to finance a new (or used) vehicle and make payments on it. If you don’t have any “breathing room,” it may be better to have more coverage.
I was already thinking about my next car. Basically, if something major went out on my car such as the transmission, I would be more likely to just replace the whole car rather than pay to have the transmission replaced. After all, that likely wouldn’t cost much less than the value of the car, anyway. So it also wouldn’t make much sense to keep my car fully covered from that perspective, either.
But, again, everyone’s situation is different. I definitely recommend doing your own research and consulting with an agent with regard to your options. But hopefully, this got you thinking!