Dear Tom and Ray:
I have a 2001 Saturn SL2 with 87,000 miles on it. The car is paid off. I live in the congested New York City area and drive it on weekends only. My boyfriend suggests I drop the collision coverage on the car to save money, and says that the car is not worth keeping under collision coverage. I am undecided. My gut instincts tell me to keep the coverage, but at a high deductible. I am known to be overly cautious, though. Do you have a "system" that helps you determine when it is time to drop the collision coverage on a car? Thanks! -- Jennifer
RAY: Our system is that anything my brother might conceivably be interested in owning is not worth having collision coverage on.
TOM: Actually, there's not a system, per se. But we can help you think through the logic.
RAY: The collision and comprehensive portions of your insurance policy pay for damage to your car, whether it's caused by an accident, vandalism or a toilet that lands on the hood after a neighbor throws it out of his second-floor window while doing a particularly frustrating bathroom remodel.
TOM: If your car is totally wrecked, the insurance company will pay you UP TO the book value of your car, minus your deductible. So, in your case, let's say your car is worth about $4,000 right now. You probably have a $500 deductible. So, in the case of a total loss, you could collect up to $3,500 to put toward a replacement car.
RAY: But remember, for each year that goes by, your car will be worth less, so your potential payoff is decreasing all the time, while your insurance bill probably is not.
TOM: Now, how much do you pay for collision and comprehensive insurance? You can look on your insurance binder. Let's guess it's about $500 a year. It could be more in New York City, just like everything else.
RAY: It's impossible to know the odds of you totaling your car in the next few years. After all, that's why they call them "accidents." So there's no absolute right or wrong answer here. The question is what makes you feel comfortable.
TOM: If you're in a position to either buy another car if you need to or live without a car if you need to, then you can drop the coverage and take your chances, knowing that if worse comes to worst, you'll have to lay out some money for new wheels or rent a car for your weekend excursions.
RAY: Or borrow the money for another car from your devil-may-care boyfriend.
TOM: And in exchange for accepting this risk, you'll have an extra $500 in your pocket.
RAY: Now, if the car were worth $15,000 and you had a $12,000 loan on it, it'd be a no-brainer to keep the collision and comprehensive. But with a car that's only worth a few thousand bucks, it's really up to you whether you'd be willing to just walk away with no compensation if you really wreck it -- and pocket the savings now.
TOM: Considering how little you drive the car, if it were me, I'd dump the coverage. But if you're the kind of person who would be up nights worrying about it, Jennifer, then keep the collision and comprehensive coverage for now. And when the book value of your car gets low enough so that you really wouldn't care if it was a total loss, dump it then. The good news is, it won't be long until that day arrives.