Is my car overinsured if my net worth is high enough?

Question

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?

Answer 1

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.