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.
Some insurance needs relate to the market value of your car and your financial comfort level in paying for repairs or replacement. As the value decreases, you should consider whether some coverages are still necessary.
Optional Car Insurance Coverage vs. Required Coverage
Understanding what is mandatory and what is optional when building your insurance policy may help you save money in the long run.
What Does a Basic Auto Policy Consist Of?
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:
- Personal injury protection. Provides reimbursement for medical expenses for injuries to you or your passengers.
- Underinsured or uninsured motorist coverage. Kicks in when a driver with little or no coverage causes injuries or property damage. Uninsured motorist property damage coverage is not available in some states. However, it is available in states that don’t require personal injury protection or underinsured/uninsured motorist coverage.
What Are Optional Auto Coverages?
While there may be other optional coverages available, many drivers add optional collision and comprehensive coverage for added protection.
- Collision pays for repairing or replacing your car no matter who is at fault.
- Comprehensive pays for losses not caused by collisions, such as fire, theft, vandalism, animal strikes and broken glass.
While these coverages work well for newer cars, they may not make sense for older vehicles depending on your financial situation.
No matter how much coverage you have, your insurer won’t pay more than what your car is worth unless you add an additional replacement cost to your policy. 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:
- You receive a check equal to your car’s actual cash value, less your deductible.
- The vehicle goes to a salvage yard.
What Is Gap Insurance and Do You Need It?
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.
When Collision and Comprehension Coverage May Be Required on Your Older Car
When you’re paying off an auto loan or leasing a vehicle, 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.
Auto loan or lease coverage may be available in your state, which covers unpaid amounts remaining on a loan in the event of a total loss. It also covers overdue lease or loan payments, financial penalties, security deposits that are not refunded and more.
The Right Amount of Coverage for Your Older Car
If you buy collision and comprehensive coverage for a car that is at least 10 years old and you’re able to cover any repair costs out of pocket, you may be paying too much for car insurance.
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 Cost of Comprehensive and Collision Coverages
The average yearly price of comprehensive coverage on a policy is about $134 while the average price of collision coverage 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 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, depending on state laws.
Calculate Your Replacement Cost
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.
Determine Whether Your Older Car is a Classic
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:
- driven less often than most vehicles
- often pampered, and saved for special occasions
- less likely to be damaged or totaled in accidents
- kept in garages, making them less likely to be stolen
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. Given the volatility of the car market, it’s important to have your vehicle appraised annually to ensure you’re getting an accurate value.
Adjust Your Policy
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 newer. As your vehicles ages and loses value, and you assess your ability to pay for damages or losses, you can avoid paying for too much coverage by dropping the policy features that no longer make financial sense.
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