I have owned my car for about 8 years now and have had 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 was totaled I have enough saved up to buy a new one. Should I consider cancelling the comprehensive coverage? Are there any calculations I could do to determine when this would make good financial sense?
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.
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!
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.