As a vehicle ages, it’s only natural for it to deteriorate and depreciate and value. During the first few years of ownership, you’ll buy as much insurance as possible just so that you’re sure you can repair your vehicle when it’s damaged. As the car gets dinged and nicked, you’re not as worried about the minor damages but still would prefer to have coverage for major ones. Compare rates now by using our FREE tool above!
It’s not always in your best financial interest to carry full coverage insurance on an older vehicle. Since being an older car doesn’t necessarily make the car a classic, it’s common for values to drop at a quick pace once the car reaches its 5th birthday. It’s tempting to carry collision for peace of mind, but carrying collision without looking into your vehicle’s insurance valuation could be a huge mistake. Here’s what all policyholders need to consider when deciding whether or not to carry collision insurance on an aged car.
What’s the difference between physical damage and property damage coverage?
Physical damage and property damage may sound like two similar coverage options but they are actually very different. Property Damage, also known as PD on policy documents, is a form of liability protection that’s required by state law.
It pays for third-party repairs when you’re the one who was responsible for them in an accident.
Physical damage coverage is optional. It consists of comprehensive and collision insurance which pays for repairs to your vehicle after you’ve suffered a covered loss. While physical damage coverage isn’t required under state-mandated laws, some contracts may state that you need to carry comprehensive and collision to satisfy terms and conditions.
What is full coverage?
Full coverage is a term that’s thrown around a lot in the insurance world. While you’re never fully covered, when you’re carrying collision insurance you technically have a full coverage policy. It will pay for liability losses, comprehensive losses and collision losses at a minimum. Other full coverage plans may include:
- Uninsured Motorist Bodily Injury
- Uninsured Motorist Property Damage
- Medical Payments or Personal Injury Protection
- Towing and Roadside Assistance
- Gap Insurance
How much will collision pay when you have a loss?
When you look through your policy declarations, you’ll notice that your documents explain just how much coverage is afforded for certain types of claim. There will be very specific limits on liability coverage, uninsured motorist, and medical payments coverage. There won’t, however, be specific limits for collision.
The main reason that collision doesn’t have a specific limit is because the value of the insured property doesn’t stay the same.
As cars age and deteriorate their value will go down. Cars that accumulate more miles will see a steeper decreased in value at a quicker pace. Because of this, it’s easiest for the insurer to state the limit of coverage as the car’s Actual Cash Value instead of a stated value.
What is Actual Cash Value (ACV)?
Simply put, the ACV of a vehicle is the vehicle’s value at the time of loss when factoring in depreciation. In most cases, insurance companies will equate ACV to the car’s fair market value in the local vicinity where the insured lives.
How quickly do cars lose their value?
Depreciation doesn’t slow after the first few years of ownership. To really get a feel for what your car is worth in the eyes of your insurer, you should have a general idea of how quickly the car you purchased new will lose its value. Here’s a quick breakdown on how fast your new car loses value:
- At the dealership: 100%
- 1 minute after driving off: 91%
- 1 year of ownership: 81%
- 2 years of ownership: 69%
- 3 years of ownership: 58%
- 4 years of ownership: 49%
- 5 years of ownership: 40%
Understanding How ACV is Determined
The breakdown above gives you a general idea of how a car holds its value, but it doesn’t show you how the insurance company will value your car.
To really decide whether it’s time to remove collision coverage from your policy you need to know what your car’s ACV is.
Companies can use several different tools and reports to decide what your car is worth. If your car is rare, the insurer might resort to using sales data from similar cars instead of the exact model you own. Here are some valuation methods:
- Kelley Blue Book values
- Computerized vendor quotes
- Vehicle sales search in the local area
- Dealer sales data
What is your collision deductible?
A deductible is the amount of money you’ll pay when you have a loss. If you have a collision loss and you’re negligent for a loss, you’ll be obligated to pay a deductible. The collision deductible is typically the highest policy deductible because the premiums for the coverage tend to be the highest. If you carry a high deductible, that dollar amount is deducted from your claim.
Doing the Math
It doesn’t make sense for everyone to remove collision insurance on their older vehicle. To truly make the right decision, you’ll need to compare the premiums for collision and the deductible to the value of your car. Dropping physical damage means that you’ll bear the burden of paying for losses without having the insurer to lean back on. It makes the most sense to do this when you can afford to pay the ACV of the car on your own or when the collision premiums are more than 10% of the car’s value.
Wise insurance consumers buy coverage that will help them in difficult scenarios while still finding a way to conserve their premiums.
If you’re driving around an older model vehicle, it might be that time to switch from full coverage to liability. You can still carry Uninsured Motorist, Medical Payments and other forms of added protection without having collision. Price the cost of coverage through an online rate comparison tool and only then can you make your educated decision. Enter your zip code in our FREE tool below to compare car insurance rates now!