17

I've been thinking lately that it might make sense to drop comprehensive and collision and self-insure these risks (obviosuly I'd keep the liability insurance). Basically, I'd keep around in a fairly liquid amount of cash equal to the replacement value of the car, and contribute semi-annual premiums to the fund equal to the market quotes for comprehensive / collision insurance, and pull from that to handle the repairs.

I think I can keep around enough cash to replace the whole car, but I'm wondering what advantages and services I might give up in going to liability only, and how I might replace them.

For example, do insurance companies negotiate with repair & body shops to keep prices low? Because if so, it might make sense to raise the deductible and keep the collective bargaining discount. On the other hand, perhaps I can piggy back with just liability insurance, or some kind of buyer's club.

  • You can even perhaps get away without annual contributions, if you start out at the value of the car: the car's going to decline in value by say 10% every year, and hopefully your savings will increase by at least a couple of percent. – poolie Sep 15 '11 at 2:03
  • I figure the contributions may help keep me self-insuring in perpetuity, and it's a good exercise to ask the market how risky I am as a driver. After all, I don't have an army of actuaries to measure crime and collisions. – jldugger Sep 15 '11 at 3:39
  • Every day of the year, your car has a certain chance of being crashed/stolen/otherwise lost in some way where comprehensive insurance will cover you. There's also some chance it will have a catastrophic mechanical failure which insurance won't help with (unless you've bought a long-extended warranty.) And also, inexorably, every mile and every kilometer, it's wearing out and losing value. People focus a lot on the first, a bit on the second, and tend to ignore the third. After ~7 years the value of the care is mostly gone even if it's insured. – poolie Sep 15 '11 at 4:04
  • Oh, I certainly keep track of my car's KBB value on my books. Not that I can use it for taxes, but it's still nice to know. I'm guessing depreciation is why everyone always saves money when they switch car insurance. – jldugger Sep 15 '11 at 16:40
  • Oddly, in some circumstances, comprehensive insurance can cost less than third-party only insurance (I assume that in the US liability insurance is the equivalent of third-party in the UK). I had this with my last renewal, where on a whim I decided to see how much money I could save moving from comprehensive to third-party, it turned out that it would have cost me money with my vehicles. I can't see how this could come about unless UK insurance companies see not wanting comprehensive insurance as being a risk in and of itself! – Mark Booth Sep 16 '11 at 12:54
11

Convenience, and of course money. In case of an event, you'll have to spend the full worth of money to fix/replace, while if you're insured - you get the insurance to pay for it. It is up to you to decide, if the money saved on the lower premiums worth the risk of paying much more in case of an event. Of course, the cheaper the car the more it makes sense not to pay the premiums. Many people do that.

Regarding the bargaining power, I actually think that you would pay less if it is not going through insurance than the bill the insurance pays. I fixed a nasty dent for like $300 at one shop, while at the other they said "It's $1200, but what do you care, your insurance will cover it" (I had $500 deductible, so in the end it was cheaper for me to pay $300 without the insurance at all).

  • Most insurance will do that shopping around for you. Though some will let you go anywhere you want so long as the repair costs fall in their charts. – user4127 Sep 14 '11 at 19:44
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    @Chad - I'm sure they'll do, but as with doctors - the price charts for the insurance is not the price you pay yourself. Had that with dentist too - they have a price list, and then they say "oh... your insurance doesn't cover that? Let me give you a 30% discount then". – littleadv Sep 14 '11 at 20:11
7

As you suspected, there is more than just car replacement taken care of by insurance (some of them are pointed out in Chad's story:

  • Rental car — usually an insurance claim will be accompanied with a rental car if the repair will take several days.
  • Lost wages — it's possible that your coverage will include lost wages for time taken to manage an accident or for hospital visits or stays. Obviously, your personal health insurance may cover the bills but not the lost wages.
  • Uninsured driver coverage — According to this source, it is required by some states but not most. Sure, you can still just replace the car with your fund if you need to, but the risk of damage to your car by an uninsured driver is higher than the risk of you wrecking it yourself.
  • Comprehensive insurance — At my insurance company, you don't get premium increases for a limited number of comprehensive claims. I've made a couple - damage from a large rock smashing a hole in my bumper on the freeway, a spill on the cars interior. My return from this coverage has been far better than my cost.
  • I believe that the uninsured motorist required doesnt really do the same thing as the one that comes with comprehensive coverage. I think it is mostly for emergency medical coverage and 3rd party property. That probably varies by state and policy though. – user4127 Sep 14 '11 at 19:54
  • @Chad - What you are saying conflicts with common definitions for what comprehensive insurance is. I don't know what your particular insurance declares it to be, but for mine and others it is not car-wreck insurance. – Nicole Sep 14 '11 at 20:12
  • Sorry I guess I just thought the comprehensive meant the whole package :p I was wrong. WHat i meant was the full coverage package – user4127 Sep 14 '11 at 20:34
  • I do have the option to buy a lot of the things you mention separately. Car rental, for example is $31 extra every six months, and I already self-insure I'm not sure about lost wages, but there are supplemental insurance plans for that, and I've got generous sick leave policy at my current employer. Could be an issue for others though. – jldugger Sep 14 '11 at 21:02
  • Err, I already self insure the car rental. – jldugger Sep 14 '11 at 21:37
5

You lose your agent services.

When my wife wrecked our car 3 years ago our agent took care of everything. He got us a rental car, made the arrangements to get it fixed, checked in to see how we were doing, and even helped us set up a second opinion on my wifes wrist surgery. The accident was ruled the fault of the uninsured driver who decided to take off through the red light. But our insurance was the one that covered it all total expenses over 80k. We would have had to eat most of those with out full coverage.

Most everything was set up (our rental car, estimates on repair, even her inital consutation with the surgeon) before the investigator had filed her report. Our agents first question was is everyone ok. His second was what can i do to help? He never asked us what happened and was always ahead of our needs in dealing with it.

If these things are not important to you, you can probably save quite a bit of money self insuring. But if you are in an accident and unable to do them yourself, do you have someone to do it for you? Do you trust them to handle your business and are you willing to saddle them with the responsibility of dealing with it? To me insurance is less about me and more about my family. It was nice that my agent did all of that for me. I would have been willing to do it myself though. But I am glad to know he is there for my wife if something happens to me.

  • 9
    I would say your story is more a testament to uninsured driver coverage than for agent services (it's not too difficult to make repair/rental car arrangements, and I've never had an agent even offer to take care of that -- after all, how do they know what works for you? It seems like it would just make it more difficult to have a middle man.) – Nicole Sep 14 '11 at 19:25
  • Renesis - Well it is part of our comprehensive package insurance. And if your agent never offered to help you when you can use it then he missed out on an opportunity to serve you. I could go with cheaper insurance. But you get what you pay for. – user4127 Sep 14 '11 at 19:35
  • 1
    I haven't had any major claims against my own insurance, but even for the minor ones, I can't see how the agent's intervention wouldn't have just made it more complicated. – Nicole Sep 14 '11 at 19:44
  • @Renesis - I went in picked up the car and signed the forms I Was in and out in 3 min tops the forms were already filled out when I got there. They offered to bring it to me at the hospital. Yes I could have done it all my self and been reimbursed. I did not have to. – user4127 Sep 14 '11 at 19:50
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    And I'm pretty sure personal injury is separate from comprehensive and uninsured motorist coverage. I have no intention shorting on that. – jldugger Sep 14 '11 at 20:41
5

You're trading a fixed liability for an unknown liability.

When I graduated from college, I bought a nice used car. Two days later, a deer came out of nowhere, and I hit it going 70 mph on a highway. The damage? $4,500.

If I didn't have comprehensive insurance, that would have been a real hit to me financially. For me, I'd rather just pay the modest cost for the comprehensive.

  • 8
    The new graduate who needs a car and couldn't afford to replace it is a very different case from the somewhat older person who has enough cash to replace the car if necessary. – poolie Sep 15 '11 at 2:02
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    When I graduated from college, I kept driving the crappy beater I had when I graduated high school. Two days later there was no deer. Ten years later there was no deer. The moral of the story is that we need to know the probability of future events to make your point valid. Some will find insurance to be a bargain over the short term, and a few over their entire lifetime. There has to be a corresponding group who don't, or the (re-)insurance company fails! For people who've got the money to insure against an event the marginal utility of money hidden in your argument is moot. – jldugger Sep 15 '11 at 3:34
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    Also, I'm pretty sure the upper bound on liability is the value of the car? – jldugger Sep 15 '11 at 20:46
  • @jldugger The point of the story is that accidents and casualties happen without regard for your financial wherewithal at a given time. Comprehensive coverage is very cheap and covers a variety of perils. If you want to keep $20k or whatever your car is worth liquid to eliminate an expense that is likely around $100/year, go for it. – duffbeer703 Sep 15 '11 at 22:25
  • Really $100? When I had comprehensive cover in Australia on a nice-but-old car with a non-risky driver it was many times higher. – poolie Sep 15 '11 at 22:54
3

If you can afford to replace your car, it is more cost effective, on average and over time, not to carry comprehensive and collision insurance. The insurance companies do make a profit, after all. However, you may be able to worry less ("What if someone steals my car if I park here?") with the insurance, and you have the knowledge the you won't have to spend your own money on a new car if something happens to this one, which may help with financial planning.

2

One way to look at insurance is that it replaces an unpredictable expenses with a predictable fees. That is, you pay a set monthly amount ("premium") instead of the sudden costs associated with a collision or other covered event.

Insurance works as a business, which means they intend to make a substantial profit for providing that service. They put a lot of effort in to measuring probabilities, and carefully set the premiums to get make a steady profit*. The odds are in their favor.

You have to ask yourself: if X happened tomorrow, how would I feel about the financial impact? Also, how much will it cost me to buy insurance to cover X?

If you have a lot of savings, plenty of available credit, a bright financial future, and you take the bus to work anyway, then totaling your car may not be a big deal, money wise. Skip the insurance.

If you have no savings, plenty of debt, little prospects for that improving, and you depend on your car to get to work just so you can pay what you already owe, then totaling your car would probably be a big problem for you. Stick with insurance.

There is a middle ground. You can adjust your deductible. Raise it as high as you can comfortably handle. You cover the small stuff out of pocket, and save the insurance for the big ticket items.

*Insurance companies also invest the money they take as premiums, until they pay out a claim. That's not relevant to this discussion, though.

  • *Oh but it is. You can't quite buy whole companies on discount like Berkshire does, and their ability to invest long term means they can out earn and thus underbid the actuarial risk. – jldugger Sep 15 '11 at 20:44
2

Here's what you do without, on the negative side, just for balance:

A bill: When I last had comprehensive insurance, it cost something like 3-4% of the value of the car per annum. (Obviously ymmv enormously but I think that's somewhere near the middle of the range and I'm not especially risky.) So, compared to the total depreciation and running costs of the car, it's actually fairly substantial. Over the say 10 years I might keep that car, it adds up to a fair slice of what it will take to buy a replacement.

Financial crisis costs: I don't know about you, but my insurance went up something like 30% in recent years, despite the value-insured and the risk going down, said by the insurer to be due to market turmoil. So, at least hundreds of dollars is just kind of frictional loss, and I'd rather not pay it.

Wrangling with the insurer: if you have insurance and a loss, you have to persuade them to pay out, perhaps document the original conditions or the fault, perhaps argue about whether their payment is fair. I've done this for small (non-automotive) claims, and it added up to more hassle than the incident itself. Obviously all insurers will claim they're friendly to deal with but until you actually have a big claim you never know.

Moral hazard: I know I'm solely responsible for not having my car crashed or stolen. Somehow that just feels better.

Free riders: I've seen people "fudge" their insurance claims so that things that shouldn't have been covered were claimed to be. You might have too. Buy insurance and you're paying for them.

Choice: Insurers are typically going to make the decision for you about whether a claim is repairable or not, and in my experience are reluctant or refuse to just give you the cash amount of the claim. (See also, moral hazard.) Do it yourself and you can choose whether to live with it, make a smaller or larger repair, or replace the whole vehicle with a second hand one or a brand new one, or indeed perhaps do without a vehicle.

A distraction: Hopefully by the time you've been working for a while, a vehicle is not a really large fraction of your net worth. If you lose 10% of your net worth it's not really nice but - well, you could easily have lost that off the value of your house or your retirement portfolio in recent years. What you actually need to insure is genuinely serious risks that would seriously change your life if they were lost, such as your ability to work. For about the same cost as insuring a $x car, you can insure against $x income every year for the rest of your life, and I think it's far more important. If I have a write-off accident but walk away I'll be perfectly happy. And, obviously, liability insurance is important, because being hit for $millions of liabilities could also have a serious impact.

Coverage for mechanical failures: If your 8yo car needs a new transmission, insurance isn't going to help, yet it may cost more than the typical minor collision. Save the money yourself and you can manage those costs out of the same bucket.

Flexibility: If you save up to replace your car, but some other crisis occurs, you can choose to put the money towards that. If you have car insurance but you have a family medical thing it's no help.

I think the bottom line is: insure against costs you couldn't cope with by yourself. There are people who need a car but can just barely afford it, but if you're fortunate enough not to be in that case you don't really need comprehensive insurance.

  • 1
    Also, when someone hits you and they are at fault, they or their insurance owes you. – Paul Sep 17 '11 at 0:33
  • @Paul that's true, though you might need to worry about people driving around without insurance. (In some locations the government covers those costs, but often only for injuries not vehicle damage.) – poolie Sep 17 '11 at 21:24
1

Insurance is to mitigate risk you can't handle yourself. (All insurance, not just car insurance.) The expected value of the insurance will always cost more than the expected value of your loss, that's how the insurance company makes money. But sometimes the known fixed cost is better for your ability to sleep at night than the unknown (though likely lower) variable cost.

If you were suddenly hit with a bill the size of your car tomorrow, would you be ok? If so, then you can handle the risk yourself and don't need insurance. If not, then you need the insurance.

The insurance company sells thousands of policies and it's much easier to predict the number out of 1000 people that will get in an accident tomorrow than the chance that you specifically will get in an accident tomorrow. So they can manage the risk by making a small amount of money from 999/1000 people and buying the other guy a new car.

0

As others have pointed out, it's all about a fixed, small cost versus the potential of a large cost.

If you have insurance, you know you will pay a fixed amount per month. There is a 100% probability that you will have to pay this premium. If you don't have insurance, there is a large chance that you will have no cost in any given month, and a small chance that you will have a large cost.

Like my home-owners insurance costs me about $50 per month. If I didn't have insurance and my house burned down, I would be out something like $100,000. What's the chance that my house will burn down this month? Very small. But I'd rather pay $50 and not have to worry about it. On the other hand, I just bought a filing cabinet for $160 and the store offered me an "extended warranty" for something like $20 a year. What's the probability that some accident will happen that damages my filing cabinet? Pretty small. Even if it did, I think I could handle shelling out $160. I can imagine my stomach in knots and lying awake at nights worrying about the possibility of losing $100,000 or finding myself homeless. I can't imagine lying awake at nights worrying about losing $160 or being force to stuff my files under the bed. I'll take my chances.

When I was young and had even less money than I have now, I bought cars that cost me a thousand dollars or. Even poor as I was, I knew that if the car was totaled I could dig up the cash to buy another. It wasn't worth paying the insurance premium. These days I'm driving a car that cost me $6,000. I have collision and comprehensive insurance, but I think it's debatable. I bought the car with cash to begin with, and if I had to I could scrape up the cash to replace it. Especially considering that my last payment for my daughter's college tuition is due next month and then that expense is gone. :-)

  • You've got a good point there. The two vehicles I drive cost me $1500 (net after selling the old one that wouldn't pass smog) and $8500, and I've had the $8500 one for I think 12 years now. (It's a hybrid, and has saved me more than the purchase price on gas.) Even if an insurance company would sell me C&C for them, why bother? – jamesqf Feb 18 '15 at 23:06

protected by Chris W. Rea Jun 20 '16 at 22:10

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