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I have owned my car for about 8 years now and have had collision and comprehensive auto insurance the whole time. The starting value of the car was around $20K. The trade-in value is currently ~$6K (~$8K private party value) according to Kelley Blue Book. If the car were to be totaled, I have enough saved up to buy a new one.

Should I consider cancelling collision and/or comprehensive coverage? Are there any calculations I could do to determine when this would make good financial sense?

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how much will it save you? –  littleadv Feb 15 '13 at 0:45
    
Around ~$150 (out of a total premium ~$400) every 6 months. –  Craig W Feb 15 '13 at 0:48
    
Do you have a local agent or do you buy your insurance over the internet(or phone)? –  user4127 Feb 15 '13 at 15:27
    
Over the Internet. –  Craig W Feb 15 '13 at 16:43
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are you talking about comprehensive (hail, theft, tree branch) or collision (accident where you are at fault for damages to your own property). You should know that the vast majority of comprehensive claims are not going to be for "totaling" of the car. So if you would be willing to drive up a banged up car from a hail storm then I would drop it. –  Pablitorun Feb 15 '13 at 16:54
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3 Answers 3

This is going to be a philosophical answer, but here it goes.

What is the purpose of an insurance? In my perspective, insurance is a way to protect yourself from risks in life you can not afford to take.

Following this principle, most of the people do not have enough money to fix a Ferrari, or pay the medical expenses of a third party--so insurance against liabilities makes financial sense, but many can afford buying an equivalent car as they are insuring.

If you have enough money to buy an equivalent car, you are paying for a risk you can take yourself. Then, instead of paying the comprehensive fee which is used to pay the different accidents, the company's administrative fees and the shareholder profits; I would save your money in a separate account and use it as a self-insurance. That is at least what I do.

I even put other insurances and extended warranties, which respective risks I have decided to absorve; that way I diversify my fund.

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Additionally, actually filing a claim could cause your insurance premiums to rise. Paying out of pocket would presumably prevent this. –  Glenn Nelson Feb 15 '13 at 19:04
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@GlennNelson Two additional cents: Submitting a claim, automatically adds the accident in Carfax---no matter how minimal is it, which indirectly reduces the car's value, and definitely you can get cheaper mechanics than what the insurance is forced to cover. –  Peretz Feb 15 '13 at 19:36
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In terms of how to make your decision, here are some considerations.

Comprehensive insurance often covers other perils besides collision, including fire, theft, hail or other weather damage, additional liability coverage etc. It may be worth looking at your specific policy to see what is covered. No matter what you do, make sure you have some form of personal liability coverage in case you are sued (doesn't necessarily need to be through the auto policy).

While it can make financial sense to drop comprehensive coverage once you can afford to self-insure against collision, this will only be the case if you are certain that you can set aside dedicated savings that you would only need to dip in to in the case of a collision or other major loss. For example, if you only have $5-$10,000 in the bank, and you happen to lose your job, and then the next month you happen to be hit in an accident and the car is totaled, could you afford to replace the car out of pocket?

I would recommend looking at dropping comprehensive insurance as similar to a "DNR" (do not resuscitate) order for your car, i.e. under no circumstances would you choose repair the car were it totaled or damaged. For example, if your car's exterior were badly damaged in a hail storm (but still ran fine), would you pay $500 or more to repair it, or would you simply get a new car?

Ultimately, this is going to be a judgement call based on how much financial risk you want to take on. Personally, I would continue to pay the extra $300 per year for now in order to insure a $6-8,000 asset (5% of the asset value) However, in the next few years the resale value of your car will continue to decline. If in a few years the car were worth $1,500, I would probably not pay the same $300 a year (or 20% of the asset's value). When you should make that choice depends on how many more years of service you expect to get from the car, which is a very localized question.

Hope that helps!

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usually collision insurance is a separate line item from comprehensive. –  Pablitorun Feb 15 '13 at 16:52
    
right, but you need to consider other perils apart from collision if you can't afford to buy a new car –  JAGAnalyst Feb 15 '13 at 17:10
    
Will the premium for collision/comprehensive coverage decrease commensurate with the declining resale value of the car? –  Craig W Feb 15 '13 at 17:15
    
Yes, both portions of the premium will decline (coll + comp) as the cost to repair or replace is lower over time as the value of the car falls. However, that amount is very specific both to the kind/condition of the car as well as risk factors specific to the driver and is probably too local to comment on with any accuracy. –  JAGAnalyst Feb 15 '13 at 17:27
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I am guessing your comprehensive deductible is around $500, and a totaling of your car would net only a $5000 payout.

The expected value of the insurance is payout * chance of occurrence.

To keep things simple lets only analyze the chance of "total" event

what percentage of occurrence would give you an expected value of the insurance of $300?

$5000*P=300 = 6%

This is simplified because it ignores smaller payouts, but I think it's probably not a good value for you as a totaling event would not be a desperate situation for you.

You can take it on faith that the expected value of ANY insurance product is less than the cost, otherwise the company wouldn't sell it. You need to decide if the insurance product is something needed by you.

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On your last paragraph: the expected value for the average policyholder in your risk pool is less than the cost, but individual policyholders may have information that raises their personal expected value beyond that average. –  Sean W. Feb 19 '13 at 20:54
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I naively like to imagine that moral hazard doesn't actually exist, but you are exactly right. –  Pablitorun Feb 19 '13 at 23:48
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