As your car gets older, you start looking at it a little differently. You may do that with your spouse, too, but that is a completely different subject.
Your older car may have racked up a lot of mileage, may have dents and dings, and doesn't run quite as well as it used to. However, you love your car and want to protect it and take care of it – again, much like a spouse.
Protecting your car involves insurance. However, as your car gets older, one particular type of insurance makes less sense – specifically comprehensive and collision insurance.
These policies limit reimbursement to the replacement cash value of your car, which decreases over time. Eventually there will be a point at which the premiums you pay are not worth the value that you are going to get out of the policy. How will you know when that time comes? (Feel free to make up your own spousal analogy here… if you dare!)
Before we look at the breakeven point, let's review what these policies cover. Comprehensive and collision insurance are generally packaged together, but they have fundamental differences.
Comprehensive insurance covers miscellaneous auto damage to your car unrelated to a collision – from events such as fire, vandalism, theft, and natural disasters such as storm damage. Collision, as you might expect, covers damages to your car that is related to a collision, regardless of what you run into, or who or what runs into you. Rollover crashes are included.
Depending on your state's rules, you may also have to carry a collision deductible waiver along with your collision policy – this covers your car in the event an uninsured driver hits you.
For both policies, you will need to decide on a deductible amount, which in turn will raise or lower your premium.
As a rule of thumb, if the payments are more than 10% of the car’s value, you should consider dropping collision coverage. The value of your car can be found using the Kelley Blue Book or Edmunds websites. You can raise your deductibles to compensate, but eventually you will hit a diminishing returns point.
If you want to do a more detailed analysis, start by finding the value of your car and subtract the deductible from each policy. This will give you a replacement cost (how much you would be out of pocket) to replace the vehicle in either case (comprehensive or collision claims).
Divide the replacement cost by the premiums you pay, and that number will tell you how many years of premiums you would have to pay before surpassing the replacement value of the car. Then ask yourself how likely you are to be involved in an accident during that time. Do your driving habits warrant keeping the policy?
This is still a bit of guesswork – it does not take into account the time value of money or the continuing depreciation of your car, among other things – but it is a good place to start.
Ultimately, whether or not a comprehensive and collision policy is worth carrying for your older car is your decision – based on where you think your money is better spent. While the 10% rule is a good rule of thumb, it depends on your habits, risk tolerance, and peace of mind. Adjust it in either direction based on your needs.
And whatever you do, don’t evaluate your spouse in the same way. If you do, you certainly won't encounter tolerance and peace of mind, and you should probably start evaluating your life insurance policy instead.