3

My net worth is approx. 200k (distributed in checking for emergency, bonds indices for bigger emergency, and stocks for retirement) and I make between 15k-35k per year (it varies). I've been accident-free since I started driving years ago, but I consider myself to be a poor driver in terms of parking coordination and somewhat below average in terms of defensive driving and overall driving skills. I drive a car whose market value is around 13k. Losing the car would be big emotional hit, but I think I could manage buying a replacement. So, one could say that I'm neither risk neutral nor risk averse, but rather somewhere in between. My current car insurance is approx. $1200/yr and I want to reduce my bill:

Liability (640$/yr):
Bodily injury 250k/500k
Property Damage 100k

Comprehensive (60$/yr):
1k deductible

Collision (370$/yr):
1k deductible

Uninsured (130$/y):
Excess coverage
Bodily injury 250k/500k
Property damage 100k
250 deductible

I have no idea what the probability distribution of the different payments/severities in an accident are. I have the feeling that I'm over-insured. Which coverages should I consider modifying?

  • If you had to replace your car, would you buy one of similar value? How much of your income are you able to save each year? – BrenBarn Jun 29 '15 at 17:56
  • I didn't mean to say that I would buy a car with the same price tag - just that I would buy a car replacement (probably for about 8k). I save about 5k per year. My previous job paid a lot more than my current job, so I've been able to save a lot more back then. If I wanted to I could change jobs to earn more in the future. – Wuschelbeutel Kartoffelhuhn Jun 29 '15 at 18:05
  • 2
    Your coverage is already low. You usually save money by making the deductible as high as you can afford. Scrimping on the coverage limit doesn't save much. – gnasher729 Jun 29 '15 at 18:46
  • @gnasher729: Thanks. I had the feeling previously that I was overinsured, but your comment seems to indicate that this is not true. The deductible is already as high as they allow. I calibrated the limits a few years back and I also now remember that it didn't make a big difference to raise them so high (probably because accidents rarely are that severe). – Wuschelbeutel Kartoffelhuhn Jun 29 '15 at 20:50
  • Have you considered not-driving? Sets your auto insurance cost to $0, and all that could be spent on Uber/taxi or on a bicycle. – Criggie Jun 10 at 1:37
3

Well, the answer for which ones you should consider modifying is easy. You can't drop liability insurance since it's a legal requirement, so you can consider dropping collision, comprehensive, and/or uninsured motorist covnerage.

The first thing to look at it whether your insurance company allows you to choose these independently. Some companies, for instance, won't allow you to get collision coverage without also getting comprehensive coverage. From what I saw, the nature of uninsured motorist insurance varies from state to state, so you should look at your policy to see what it covers compared to collision (e.g., whether it covers hit-and-run collisions).

Whether you should actually drop any of these is harder to say, since it depends on your personal judgment of how likely various possibilities are, and how much you could afford to spend. Obviously the most expensive one is collision coverage, so that's the one to look at most carefully. If you google for "when should you drop collision coverage" or the like you can find many pages discussing the issue. (Here is one.) I found a couple that suggest dropping collision coverage when your annual premium is more than 10% of your vehicle's value. From what you say, you're quite a ways from that point.

One thing you could do is begin saving money into an account earmarked for car repairs/replacement. As time passes, you will build up money in the account, and your car's value will decrease. Once you have built up enough money in this account relative to your car's value to feel comfortable, you could cancel collision coverage. (You wouldn't necessarily need to build up as much as the whole value of the car, assuming you have an adequate general emergency fund. The idea would be that if your car was totaled, you could dip into your emergency fund, because that would be more of a "real" emergency. But if your car was damaged in an accident but still required a fairly expensive repair, you could use your car fund to pay for the repairs.)

Another option to look into is raising your deductible. You'd have to look at what deductibles your insurance company allows. Depending on how much you want to reduce your premiums, you may be able to satisfy yourself by taking a higher deductible.

  • Thanks for your detailed answer. Re: your first paragraph: I could reduce liability to the state required minimum, which covers approx. 10x less liability than my current one. – Wuschelbeutel Kartoffelhuhn Jun 29 '15 at 20:37
  • 2
    Reducing liability to minimum increases risk to you to maximum, if you get sued for more than that. If you have enough net worth to be worth suing, that may be a bad bet. (I have liability/injury very high for that reason, plus an umbrella policy over both car and house, plus a rider on one particular object that would be hard to replace and that i'd miss -- and this despite my being a firm believer in self-insuring whenever appropriate. Too many insane awards... – keshlam Jun 29 '15 at 20:51
  • 1
    On the other hand, comprehensive insurance -- which covers damage to your own car -- is very much optional if you can afford to do the repair or replacement out of your own pocket. That's a place where self-insuring is clearly the better bet. – keshlam Jun 30 '15 at 0:24

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.