When you buy a new car it’s important to make sure it carries a full range of auto insurance protection, but you can save money by reducing coverage as the vehicle ages.
Insurance needs relate to the market value of your car. As the value decreases, you may find there are some coverages that are no longer necessary.
Understanding what is mandatory and what is optional when building your insurance policy may help you save money in the long run.
A basic auto policy consists of bodily and property damage liability, which most states require. This coverage protects you when you injure someone in a car accident or damage their car or property. Each state sets the minimum level of coverage.
Some states also require motorists to carry:
Many drivers add optional collision and comprehensive coverage for added protection.
While these coverages work well for newer cars, they may not make sense for older vehicles.
No matter how much coverage you have, your insurer won’t pay a claim that exceeds what your car is worth. Insurers often declare older vehicles to be total losses when the cost of repair exceeds their market value, noted Amy Bach, executive director of the United Policyholders insurance consumer group. In such cases:
When you’re paying off an auto loan, you may be required to carry collision and comprehensive coverage, in addition to liability insurance. Lenders need to protect their financial interest in your vehicle until your loan is repaid. Once you own your car free and clear, you can decide whether cost of collision and comprehensive is worthwhile.
If you buy collision and comprehensive coverage for a car that is at least 10 years old, you may be paying too much for car insurance.
Tip:
Weigh what you are paying in premiums against what you are likely to get back from your insurance if your car is damaged, said Carole Walker, executive director of the Rocky Mountain Insurance Information Association.
The average yearly price of a comprehensive policy is about $134 while the average price of a collision on policy is about $290 per year, according to the Insurance Information Institute. Deductibles for collision and comprehensive typically range from $250 to $500, said Walker. While taking a high deductible can reduce your car insurance rates, be sure to have the funds on hand in case you need to file a policy claim.
“If you drop comprehensive and collision on an older vehicle it can be a smart choice,” she said. “You will save on premiums, but to understand that you will have to pay for repairs out of pocket, if you need to file a claim.”
Many consumers choose to err on the side of caution by keeping collision and comprehensive coverage for older cars, said Bach.
The piece of mind gained, may not be worth the money spent if the car is declared a total loss. According to Kiplinger, which publishes financial advice, insurers tend to declare a car to be a total loss if the cost of repair reaches 75 to 80 percent of the car’s retail value.
Kelley Blue Book says if your annual cost for comprehensive and collision insurance exceeds 10 percent of the value of your car, you should consider dropping the coverage. If that’s the case, there’s a good chance that any insurance payout you receive following an accident will be less than the amount you paid for the added coverage.
Example:
Your car is worth $4,000. Your comprehensive and collision premiums cost more than $400 a year. It may be time to drop the coverage.
If your car is totaled and you feel that your insurer undervalued your vehicle, you can negotiate by providing examples of what people are paying for similar cars in your community.
Before cutting back on coverage for your older car, you should take time to figure out how much it would cost to repair or replace it if you had to cover the amount out of pocket. It may make sense for you to keep full coverage if your older car has maintained a high resale value.
Repairing older cars typically is less costly than newer vehicles, because they use less advanced technology. Replacement parts for older cars typically are less costly also.
Sometimes drivers owe a lender more than the actual value of their vehicle. If this is the case with your car, consider buying gap insurance. If your car is totaled, this policy will pay the difference between the actual cash value of your car and what you owe the lender.
“Anytime you have a lien, understand the fact that the insurance company will pay you what the car is worth, but your car loan may be more than that,” said Walker.
You can research how much your car is worth by contacting local auto dealers. Another way is by consulting auto buyer guides, such as theNational Automobile Dealers Associationor Kelley Blue Book.
Most cars lose value as they age, but in some cases older cars attain a greater value by achieving classic car status. When that happens, drivers often can find discounts by buying classic car insurance.
Classic cars generally must be at least 25 years old. You typically can find the best price on classic car insurance if you work with an agent who specializes in such policies, said Bach.
Often, insurance companies give classic car owners a price break because (typically) classic cars are:
Before you buy insurance for a classic car, you may wish to have its value appraised so your policy will accurately reflect its worth. This is especially important if you have made improvements that have increased its value.
If you decide to store your car during harsh winter months, you can save money by suspending your coverage. Just make sure that the car is roadworthy before returning it to the highway in the spring.
It’s good to periodically reexamine your level of car insurance coverage. As your protection needs change, so can your policy. A good goal is to have adequate coverage, but not more insurance than you need.
A broad range of protection may be the right choice when your car is new. As your vehicles ages and loses value, you can avoid paying for too much coverage by dropping the policy features that no longer make financial sense.
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