As premiums for our car insurance seem to soar ever higher each year, most of us are always on the hunt to shave a few bucks off those costs. Owning your car outright – or, in other words, it’s paid off and you have the title – affords you some freedom in picking and choosing your coverage.
Liability is the insurance that most states require we carry in order to register a car. It covers injuries and damages to other parties and their property. If you want to register your car in those states, you must have it. Unfortuanately, its cost represents the lion’s share of the average car insurance premium.
Although there are areas where you may be able to trim some cost, such as uninsured motorist, towing and car rental, eliminating these won’t put much of a dent in that annual premium. After liability, the bulk of your premium goes to the two Cs of car insurance: collision and comprehensive.
If you own your car outright and have the title, you can drop one or both of the Cs. But, beware. There is more to consider than just saving a little money on the premium to consider when thinking of dropping one or both of these types of insurance.
Collision Versus Comprehensive Insurance
Collision insurance pays for repairs to your car when it comes in contact with another vehicle or stationary object, such as a guardrail, tree or light pole. Usually collision insurance kicks in for incidents for which you are at fault; although, in the cases of damage caused by an uninsured or hit-and-run motorist, your collision insurance would pick up the slack.
Comprehensive insurance is a bit misleading because it doesn’t cover every sort of damage to your car, as the term implies. Instead, it pays for damage to your car that’s not caused by the actions of a driver: either you or someone driving another vehicle. Damage from a mudslide, rock slide or hail storm would all be covered by comprehensive insurance.
If you drove into a tree, that would be covered by collision insurance; if a tree fell on your car, that would be covered by comprehensive insurance. Although a lender will insist you carry both Cs, you are free to drop one or both if you own your car.
That Dirty Deductible
Unlike liability coverage, both collision and comprehensive coverages have a deductible, which is the amount of a claim that you will pay out of your own pocket, leaving your insurance provider to pay the balance. If the deductible is $500, and you file a collision or comprehensive claim for $2,000, you will pay the first $500, and your insurance provider will pick up the remaining $1,500.
When Does Dropping Collision and Comprehensive Make Sense?
If you do own your car, you only have to carry state-required liability insurance. So why not just drop the collision and comprehensive, and save some money, right? Maybe.
The key to this decision is knowing the market or book value of your car. The older your car, the less it’s worth and the more likely your insurance company will total it out if you file a claim. This means that they will junk your car, paying you its market value minus your deductible.
You must also know how much of your insurance premium goes to pay for each type of coverage and do some math. If you can comfortably afford to lose your car’s cash value, or equity, in the case of a complete loss, you might decide those collision and comprehensive premiums would serve you better going into savings, or helping you pay off bills. However, if you are on a tight budget and would need your car’s equity as a down payment on a replacement car, you might not want to roll the dice by dropping coverage.
What It Means to You
Let’s face it, car insurance is one of those things that we pay for that we hope we’ll never have to use. If you can’t afford to take care of collision repairs to your car or replace it without whatever its cash value might be, it’s probably smart to continue paying those collision and comprehensive premiums.