Dropping Collision On An Older Car

Collision and comprehensive are together known as physical damage coverage, and they share a feature that liability does not: their payout is capped by what the vehicle is worth. Not what you paid, not what it would cost to replace with something equivalent — the actual cash value at the moment of loss, less your deductible.

That cap is what makes the decision arithmetic rather than temperament. As the vehicle depreciates, the maximum the coverage can ever pay falls, while the premium for it does not fall nearly as fast. Eventually the two converge.

The calculation

You need three figures, and all three are obtainable without asking anyone's opinion.

First, the annual premium attributable to collision and comprehensive specifically. This is not the total policy premium. It is broken out by coverage on the declarations page, which lists each coverage with its own limit, deductible and premium. If you cannot find it, the carrier will provide it on request.

Second, the vehicle's actual cash value — a realistic private-sale or trade figure for your specific mileage, condition and region, not the optimistic end of a valuation range.

Third, your deductibles.

Now: the most the coverage can ever pay you is the actual cash value minus the deductible. Call that the maximum recovery.

Assume, purely as an illustration, a vehicle with an actual cash value of $4,200, a $1,000 collision deductible and a $500 comprehensive deductible, and combined physical damage premium of $560 a year. Maximum recovery on a total loss under collision is $3,200. Divide $3,200 by $560 and you get about 5.7 — meaning roughly five and a half years of premium equals the largest cheque the coverage could ever write, assuming the vehicle's value held still, which it will not.

That ratio is the decision. There is no universal threshold at which it becomes wrong, because the answer depends on whether you could replace the vehicle out of pocket. But when the ratio drops into low single digits, you are paying a substantial fraction of the asset's value every year to insure it, and the case for self-insuring gets strong.

Re-run it annually. The numerator falls every year; the denominator generally does not.

Drop collision before comprehensive

If you decide to trim, take collision first. Three reasons.

Collision is usually the more expensive of the two, so most of the saving is there. It also responds only to impact events, and an at-fault impact is the one category of loss most within your influence — which is a poor argument for insuring it and a decent one for not.

Comprehensive, by contrast, is generally cheaper and responds to the things that happen to a parked car: theft, fire, hail, flood, falling branches, animal strikes. In most policies it also covers glass, and in many states glass is handled under a separate or waived deductible. Those events do not care how carefully you drive, and a windscreen on a vehicle with a camera behind it can carry a calibration bill that makes the coverage look sensible even on a modest car.

There is also a mechanical asymmetry worth noting: comprehensive claims are frequently smaller than the vehicle's total value, so the coverage stays useful further down the depreciation curve than collision, whose largest and most likely payout scenario is the total loss that the value cap constrains.

The disqualifying conditions

Before running any of this, check whether the decision is yours to make.

If there is an outstanding loan or a lease, the lender or lessor almost certainly requires both coverages, and dropping them is a breach of the finance agreement. The usual consequence is force-placed insurance — cover the lender buys on your behalf, charged to you, typically at a considerably worse price and protecting only the lender's interest. Do not go near this.

If you could not replace the vehicle from savings within a week or so of losing it, keep the coverage regardless of what the ratio says. The ratio measures expected value; it does not measure how you would get to work on Monday.

And if the vehicle is genuinely near the end of its economic life anyway, the physical damage question folds into a larger one about whether to keep repairing it at all — the framework for that is in the repair-versus-replacement question, and it is worth resolving first.

What changes on the policy, and what does not

Removing collision and comprehensive does not touch liability, uninsured motorist coverage, or medical payments and personal injury protection where those apply. Those are separate coverages with separate limits, and the reasoning behind them is unrelated to the vehicle's book value. See why liability limits are the wrong place to economise — the case for keeping those intact only gets stronger when the car is old, because a modest vehicle is perfectly capable of causing an expensive accident.

One practical note: removing a coverage mid-term is generally straightforward and usually produces a pro-rata adjustment, but the specifics of cancellation and refund treatment are governed by state regulation and the policy form. Ask what the change does to your policy before you make it, and get the revised declarations page afterwards to confirm the change actually landed the way you intended.

Related from the desk

• The Cost Of A Lapse In Coverage