Should You Remove Physical Damage Coverage for Your Vehicle?May 17, 2018
Whether you pay monthly, quarterly, bi-annually, or yearly, the day your car insurance premiums come due is usually a painful one. I know, because I feel it when I have to pay my own insurance premiums; and I sell the product! There aren’t too many things that you buy that you can’t immediately use, and even fewer that you buy hoping to NEVER use. In that regard, insurance is kind of in a class by itself, and so it isn’t hard to understand why people want to save money on their insurance premiums.
There are multiple ways to save money on a personal auto policy. One of the big ones is evaluating whether or not it is worthwhile to continue to buy Physical Damage Insurance for your vehicle. Physical Damage Coverage is how you can insure your vehicle for numerous types of losses. Make sure you don’t get it confused with Property Damage Liability, which covers you for the cost of damages you cause to someone else’s property.
In some cases, it may be a good idea to remove Physical Damage Coverage from your auto policy and in other cases it is probably a bad one. Here are a few things to consider before changing your policy’s coverages:
1. Do I have a loan on my vehicle?
If your vehicle is financed, the lien holder (usually a bank) is more than likely going to require that you maintain “Full Coverage” on the vehicle while you still owe a balance on your loan. Full Coverage means that you need to carry Comprehensive and Collision coverage on the vehicle.
Comprehensive coverage insures for damages caused by things like falling objects, an animal collision, or fire, while Collision coverage insures for damages arising from the collision, overturn, or upset of the vehicle. The vehicle you are driving is the bank’s collateral for their loan and they will want to make sure that the collateral is secured by an insurance policy, similar to how a mortgage company will require homeowners insurance on a home.
So, if you have a vehicle loan, the decision to keep Physical Damage Coverage is pretty simple because the bank is making it for you.
2. How old is your vehicle?
If you are driving an older vehicle that has high mileage, the Actual Cash Value of your car may not be as much as you think. Most private passenger autos depreciate each year, with the exception of some antique vehicles. The amount you may be able to receive from the insurance company if your car is totaled may not make it worthwhile to pay an expensive collision premium, especially when you consider the policy deductible will be taken off the payout amount.
If your car is only worth a couple of thousand dollars, it is possible to have paid the vehicles worth in collision insurance premiums after a few years! Collision premiums are affected by the car’s value, so it typically becomes less expensive to insure as the car gets older and less valuable.
But, it is still a good idea to evaluate whether or not the amount you would receive for the vehicle after an accident justifies the cost of the insurance. This is also a consideration if you have a golf cart that you will be using on the road and are trying to determine whether you need physical damage coverage for it.
3. What is your financial situation?
Some policyholders may be in financial situations in which they are capable of replacing a vehicle out-of-pocket and wouldn’t need to incur debt or secure a loan in order to replace their means of transportation. Others may find it difficult to buy a new vehicle that would cost even $2,000, or less. Each person’s situation is different.
The person who may be able to sustain a loss and replace their vehicle with savings or a more generous income stream may be able to assume the risk of “self-insuring” their vehicle sooner. The loss of a ten thousand dollar vehicle may not put them, or their families, in a vulnerable financial position. As such, they may want to think about dropping collision insurance coverage sooner than someone who would endure significant financial hardships if they had to replace a vehicle from their own checking or savings account.
If you feel that you fall into the latter category, or believe you would have difficulty securing an auto loan, and therefore would need the cash to buy a replacement vehicle outright, you probably should maintain the collision insurance coverage on your vehicle, even if it is a lower value car.
Before customizing your car insurance policy or changing the coverages on your current policy, it is important to evaluate your situation and determine what is best for you and your family. How would totaling your vehicle and receiving no money for it after the crash affect your financial bottom line? Is it even worth paying the insurance premium for what you would like be able to receive for the damaged car?
No one can make these decisions for you; it has to be your decision. However, your insurance agent can help you to determine how much money you would save by deleting the Collision Coverage and explain what kinds of damages would be no longer covered on your personal auto policy. As with most things in insurance, it is best to have a discussion with your agent about how to receive the best value from your insurance policies so that you can make educated and informed decisions about your coverages and how they can affect your financial situation in the present, as well as the future.
Disclaimer: Information and claims presented in this content are meant for informative, illustrative purposes and should not be considered legally binding.