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Welcome to your “2-Minute Money Manager,” a short video feature answering money questions submitted by readers and viewers.
Today’s question is about insurance; specifically, whether it’s a good idea to drop a seemingly important part of any car policy: comprehensive and collision coverage.
These days, I carry full coverage on my car, including comp and collision. But there was a time not long ago that I didn’t. What makes the difference? Watch the video below to find out. Or, if you prefer, scroll down to read the full transcript.
You also can learn how to send in a question of your own below.
For more information on this topic, check out “The Complete Guide to Getting the Best Possible Deal on Car Insurance” and “Get a Free Copy of the Report That Impacts Your Car Insurance Rates.” You can also go to the search at the top of this page, put in the words “car insurance” and find plenty of information on just about everything relating to this topic.
Got a question of your own to ask? Scroll down past the transcript.
Don’t want to watch? Here’s what I said in the video
Welcome to your “2-Minute Money Manager.” I’m your host, Stacy Johnson, and this question is brought to you by MoneyTalksNews.com, serving up the best in personal finance news and advice since 1991.
Our question today comes from Don:
“I have a 2006 Ford F150 and a 2010 Ford Escape, both paid for. At what time is it financially best to no longer carry collision and comprehensive insurance on these vehicles and simply go to liability?”
Let’s begin with an explanation of what comp and collision is.
Collision — as the name implies — covers you if you collide with something or somebody. For example, if you run into a pole or run into another car. In short, collision is what fixes your car when you hit something and you’re at fault. (If it’s another driver’s fault, his or her liability coverage should pay to fix your car.)
Comprehensive, on the other hand, covers a comprehensive list of things that could damage your car. It covers basically everything that doesn’t involve collisions. For example, you hit a deer, a rock hits your windshield or your car gets stolen, vandalized or hail-damaged.
Don’s asking when it makes sense to drop comp and collision. Keep in mind that you never, ever should drop liability. It’s required both by law and common sense.
If your car isn’t paid for, your lender will require you to have comp and collision. Once you own your car outright, you can ask yourself, “Should I keep paying for comp and collision?”
There’s a well-known rule of thumb, which we’ll call the 10 percent rule. It suggests that when the premiums for comp and collision exceed 10 percent of the value of your car, you might consider dropping these coverages.
Example: Your car is worth $5,000, and you’ve got a $500 deductible. If your car gets totaled, you’ll get a check from the insurance company for $4,500: $5,000, less the $500 deductible. Using the 10 percent rule, if you’re paying more than $450 for comp and collision — 10 percent of $4,500 — you’d consider dropping it.
This is a rule of thumb. It doesn’t mean you have to or should do this. If you can’t afford to fix or replace your car, and one of the things covered by comp and collision occurs, you could be in hot water. If that makes you nervous, retain the coverage.
Personally, I don’t currently drive an inexpensive car, but I have in the recent past, and I did drop my comp and collision. The car wasn’t worth much, about $5,000. I had money in the bank to replace it should it prove necessary, and I’d driven for decades without filing a claim. So, I judged that comp and collision was costing more than it was worth.
This is something you can think about as well.
I hope that answers your question, Don. Have a super-profitable day and meet me right here next time!
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I founded Money Talks News in 1991. I’m a CPA, and have also earned licenses in stocks, commodities, options principal, mutual funds, life insurance, securities supervisor and real estate.
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