This question was posted in our HTM Facebook group by Rebecca…
“I have a 2016 Hyundai, paid off, and Kelly Blue Book says it’s worth $5,000 – $7,000. I’m currently paying full coverage for car insurance and I’m thinking about switching to liability only.
I work from home and only drive about 7,000 miles per year. My plan is to keep the car until it’s well and dead.
With my car’s current value, should I make a change or keep it at full coverage? What are some things to consider when making this decision?”
The short answer:
Yep! You should 100% consider dropping full coverage as a way to lower your premiums.
You can bank all that cash and put it towards repairs, a new car sinking fund, or additional investing.
But, it’s super important to have a beefed-up emergency fund to go this route. Because if you get in a crash and it’s your fault, you’ll be on the hook for replacing your car. And you’ll need to have the cash on hand to do so.
If that worst-case scenario happens, will that add significant financial strife to your life?
Here are some things to consider, Rebecca…
Dropping full coverage
We love that you are scrutinizing your insurance coverage. It’s something we tell everyone to do every couple of years.
One of those factors in deciding the right insurance policy for you is how much coverage you actually need. You might be overinsured, and paying excessive amounts.
There’s no exact answer, but typically makes sense to drop full coverage if:
- You drive an older model car that’s not worth much
- The car has incredibly high mileage
- The cost of the premiums is too high to justify a low replacement cost.
- If you don’t drive very much
Rebecca, it sounds like your situation ticks a few of these boxes! So it’s definitely worth looking into dropping full coverage in hopes of saving meaningful premium dollars.
Cash reserves
Before you drop collision coverage, have a long think about how you would go about replacing or repairing your car if you do have a crash.
How big is your emergency fund? Can you buy a $5-7k car in a pinch if you need to?
If you had to take out a loan, how much would that strain your finances and could you pay it off quickly?
Keeping the liability portion of your policy means the other person’s car is covered in a crash. But it’s not going to replace that Hyundai!
So before modifying your policy, double-check your reserves and backup plans.
Your risk tolerance
Another thing to consider is how well you’ll sleep at night if you drop collision coverage.
We of course want you to make the best move financially and save the most money. But, not if it’s going to stress you out and erode your peace of mind!
Some folks will happily pay that extra $50 a month to feel better and have a policy that covers them fully in the event of an accident.
But financially savvy folks will look at the math and probability. $50 a month is $600 a year – that’s a decent chunk of change towards self-insurance!
Personally, I’d be happy taking on the extra risk and dropping collision insurance coverage. If I had the cash reserves, it would be a no-brainer.
Increasing the deductible
Another option to consider is increasing your deductible and seeing how much that affects your policy premiums.
If you don’t have the $5-7k to replace your car, but you do have $2,500 or so in reserves, you might be able to increase your deductible while you continue to save up.
It won’t drastically reduce your policy costs, but it will reduce them some. It’s a way to have more personal skin in the game, but still remain more fully covered.
Again, the math has to make sense. There’s no point in increasing your deductible to only save $4 per month. But check with your insurance provider and see! The savings are often far more substantial, making it a worthwhile option.
Low mileage discount
One other thing to ask your agent is whether or not you qualify for a discount based on how few miles you drive.
Most insurance companies will reduce the premiums if you drive fewer than 7,500 miles in the average year.
So not only might you save by switching your policy to liability only, but you could get another helpful discount because you’re not behind the wheel as much as average drivers. Double win!
Those stacking discounts can add up in a big way and reduce your overall auto costs!
The Bottom Line:
As your car gets older and the replacement cost gets lower, self-insurance becomes more economically smart.
You’ll never want to skimp on liability insurance (what happens if you hit a Mercedes!). However, dropping collision coverage for your own vehicle can save you a lot on policy premiums.
Oh, and keep that Hyundai for many more years! It’s just a 2016, which means you’ve easily got another decade with it if you’re willing to commit.
And it sounds like you are. Which is fantastic!
For the full version of this discussion, check out Podcast Episode #793 (it’s the 4st question in the episode)
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