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The following article was published in our article directory on February 2, 2011.
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When To Pull The Plug On Unaffordable Auto Insurance Rates

Article Category: Finances

Author Name: Jeffrey Wells

You could be paying for more car insurance than you actually need, or are required to have. In fact, most drivers have more insurance coverage than they are required to have. The idea of letting certain coverages drop may not only seem peculiar, but even a bad decision. Given this, it's worth taking a closer look at this issue.

In this article you'll learn about collision and comprehensive insurance coverage. If you have either of these coverages, there is a risk that you're overspending on your insurance coverage. We'll explain when it makes sense to drop them.

Overview Of Auto Insurance Coverage Types

To recognize the reasons why collision and comprehensive insurance coverage are often unnecessary, it's useful to know about the different coverages out there. As already noted, some are compulsory while others are optionally available.

Third-party liability is mandatory in just about every province. It is applied to injury or property damage for which you are found liable.

Accident benefits is likewise compulsory. It extends compensation in the event you or your passengers are injured or killed as the result of an accident.

A different sort of mandatory coverage (depending on where you live) is uninsured/under-insured motorist coverage. Here, compensation is paid for any injury or property damage caused by a motorist who lacks sufficient coverage.

Direct compensation coverage is available in Ontario, Quebec, and New Brunswick. Expenses related to damage to your vehicle are paid by your insurer, even if you were not responsible for the accident.

Optional coverages include loss of use, family protection, and collision and comprehensive coverages. Loss of use pays for transportation when your vehicle is in the repair shop. Family protection pays for losses stemming from the injury or death of you or your family due to an accident caused by a driver with insufficient coverage.

Collision coverage pays for damage to your vehicle that results from an accident. Comprehensive pays for damage that results from non-accident events (e.g. falling rocks, flood, etc.). Both are expensive, which is the reason it pays to consider pulling the plug on them.

Simple Models Can Lead To Bad Choices

There was a time when experts recommended dropping collision and comprehensive after a set number of years. The rationale was that vehicles depreciate to the point that both coverages become cost-prohibitive. While this is true, the model contains problems that are likely to lead to expensive mistakes.

First, while today's automobiles depreciate, they do so more slowly than they did a generation ago. This warrants at least updating the number of years at which the cutoff point is determined.

Second, some cars retain their market value better than others. For example, vehicles made by Honda are known to retain their values better than those produced by Ford and General Motors.

Third, many consumers carry auto loans on which the balances owed are greater than the values of their vehicles. Were they to simply drop these coverages without reviewing their circumstances, they might expose themselves to a financial loss in the event of an accident.

So, when is the appropriate time to discontinue collision and comprehensive coverages? We'll explain in the next section.

How To Determine The Cutoff Point

The formula is simple. You should consider cutting off collision and comprehensive when their combined annual cost exceeds 10 percent of the amount your insurer will pay you in the event your car is totaled. The following example will clarify the formula.

Suppose you own a 2000 Toyota Camry LE Sedan with a market value of $4,600. Further suppose you are paying $300 a year for collision and comprehensive with a $1,000 deductible. If you total your Camry, you'll receive approximately $3,600 from your insurer. Because the annual cost for both coverages is below 10 percent of the hypothetical payout, you should keep them.

Suppose your car's value drops to $3,900 the following year, and there is no change in the amount you pay for collision and comprehensive. In this case, the combined cost of both coverages would cross the cutoff point. The $300 in annual premiums is greater than 10 percent of a $2,900 payout from your insurer (given a $1,000 deductible).

It pays to review your auto insurance policy with a keen eye for unnecessary coverages. That's the only way you'll determine when it's time to pull the plug on them.

Keywords: car insurance, finance, Ontario car insurance

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