For most of us, transportation is one of our biggest expenses. If you own a vehicle, purchasing insurance coverage is required in most states. When you have a car note, most lenders require you to have full coverage on your vehicle. But once that loan is paid off, you may find yourself asking this question: How do I determine when to drop full coverage?
The answer to this question will vary based on your financial situation. In this article, we will explore the risks and benefits of making such a decision. Yes, removing collision and comprehensive insurance coverage can save you money, but is it worth it?
How to Determine When to Drop Full Coverage on Your Vehicle
At what point don’t you need full coverage on your vehicle? Is it ever worth it to drop it down to something more basic?
The Cost of Insurance Coverage
According to a NerdWallet article on average car insurance costs, the average price of car insurance in 2020 is $1,427 per year for drivers with good credit. The cost for car insurance increases a lot if you have poor credit or a DUI on your record. In Louisiana last year, I was paying $130.75 a month for a full coverage policy with Geico, which equals $1,569 per year.
Towards the end of last year, I started asking myself if this coverage was necessary. My 2012 Nissan Altima was a little over 7 years. I brought it brand new, and at that time the lender required me to purchase full coverage insurance.
Before deciding when to drop full coverage, I thought it was a wise decision to do some research on what it protected me from.
What is Full Coverage? What does it Cover?
Full coverage insurance usually includes these policies:
Collision insurance covers repairs to your vehicle if you hit another car or stationary object. This is coverage I could have used when I backed into a pole a month after purchasing my car. After giving it some thought, I elected not to file claim because the price of my insurance probably would have gone up – the cost wasn’t worth the risk of damaging my driving record.
Comprehensive insurance, on the other hand, covers non-collision accidents. For example, I used this policy a few times after rocks hit my cars windshield while driving on the interstate.
Here are some other non-collision incidents:
- Vehicle Theft
- Hail Damage
Having these policies minimize your out of pocket expenses. If you get into a wreck or your windshield gets hit by a rock, you only have to pay the amount you selected for your deductible. Once you hit that deductible, the insurance covers the rest.
For example, when my windshield got hit by a rock, I had to pay $50 (my deductible) each time I got it replaced.
How Much Money Can You Save by Foregoing Collision and Comprehensive Coverage?
While doing some research, I found that most people could save up to 50% on their insurance if they dropped collision and comprehensive coverage. To see how much you could potentially save, try editing your coverage online, if that’s an option.
When I edited my own coverage, removing collision and comprehensive coverage, my monthly bill dropped from $130 a month to $75 a month. This represented a savings of around $670 a year! A substantial amount, right?
It is but we also have to consider the potential financial losses we can incur as a result of not having full coverage.
Although you can save a lot of money when you drop full coverage, you can also lose a lot of money if something happens to your vehicle. Some questions you should ask yourself before dropping coverage are:
- How much will it cost to replace my vehicle?
- Will I have to go into debt to repair or replace it?
Once you remove collision and comprehensive, your out of pocket expenses will increase considerably – you are now responsible for replacing your car if it gets flooded, stolen, etc.
If you have a healthy emergency fund and/or sinking funds, you may be able to withstand the worst-case scenario above. But if you don’t, you may have to go into debt to fix things, which can leave you worse off financially.
How the Value of Your Car Should Factor Into Your Decision Making
Depending on the value of your car, it might not make since to carry full coverage. You can check the value of your car by going to Kelley Blue Book. Now that my car is only 8 years old, the value is low – somewhere in the neighborhood of $1,500.
Some experts suggest you should drop full coverage when your car’s value hits $2,000 or lower. It’s up to you but I’d suggest reviewing your financial health and being brutally honest with yourself before deciding to eliminate coverage.
After taking a look at my car’s value and my emergency fund recently, I personally decided to drop full coverage.
Should You Drop Full Coverage on Your Vehicle?
Knowing when to drop full coverage on your vehicle depends on your financial situation. Someone who has a large emergency fund can possibly get away with self-insuring (meaning, dropping your coverage to the most basic level – we all still need liability coverage by law). And someone who has a large emergency fund may prefer keeping full coverage for the peace of mind it brings them.
Like most personal finance decisions, there are no right and wrong answers. Just make sure you don’t put your financial life at severe risk by deciding to skimp out on insurance. You may need to increase your emergency fund before making such a move to avoid digging yourself into a hole financially.
Here are some alternatives options:
- Focus on improving your credit score so that the cost of your policy will decrease once you renew it
- Read our article 10 Ways to Get the Cheapest Car Insurance Rates
- Cut another expense instead that doesn’t protect an asset (i.e., clothing, cable, vacations, etc.)
- If you have had a wreck, try taking a defensive driving class to lower the price of your insurance
- Look into whether raising your deductibles on your collision and comprehensive policies make sense
- Check to see if your insurer charges a fee for paying with a credit card and opt to pay by bank draft instead if that fee is lower
Whatever decision you make, be sure to ask your insurance agent questions if you don’t fully understand something.
Have you dropped full coverage recently? What did your decision making process look like? How much money are you saving per month?
AUTHOR Jerry Brown
Jerry Brown is an adventurous bibliophile who loves personal finance. He is the mastermind behind the blog Peerless Money Mentor. When he is not reading thought-provoking books or studying finance, he is spending time with family, biking, or taking a random adventure somewhere.