Should I pay off my car early so I don't need full coverage insurance?
October 30, 2014 1:40 PM   Subscribe

Wondering if you could help with a risk-benefit analysis of lowering the amount of insurance on my car. I still owe money on it, but I could potentially pay it off and then save money on my insurance. BUT is the insurance good to have anyway?

I am doing okay financially, but I am in debt. I have a cushion that would sustain me for around 10 months.

I have around 30K in student loans that are currently deferred but are gaining interest at 6.8%.

I have around 7K in car debt [9k value on car] that I am paying $198 a month on, that is gaining interest at 3.99%

My auto insurance costs around $180 a month.

Logic says I pay off my student loans first, and I have. 1K here, 1k there. However, the rate on my car insurance just jumped to around $200 a month for full coverage and a low deductible.

My lein holder (credit union) is making me get this good insurance, but from what I can tell, auto insurance doesn't actually help you, it just lends you the money to make repairs that you pay back in increased premiums, and also helps the other driver if they don't have insurance and have big damages. [no fault, in michigan, if that matters]

So, I could potentially dip into my cushion a bit and pay off my car, thus reducing the amount of required insurance. Then I could reduce the insurance to around $100 a month for more minimal insurance, knowing that I would be alright if I did get into an accident.

So, my question is, do you think that full coverage is worth it? And given my financial situation, is it more prudent to be investing money in my car so I can have the added benefit of a reduction in insurance costs, making up for the disadvantage in interest rate?


PS: I've never made a claim before and I am scared to, one because any damage to my cars has always been cosmetic only, and two because I don't want my rates to jump up.
posted by bbqturtle to Work & Money (19 answers total) 1 user marked this as a favorite
I am not really reading your question.

Do not ever ever ever drop your full coverage if you can afford it, unless, like.... Nope. I can't think of any time I had full coverage that it was a regret.

Keep your car insured.
posted by jbenben at 1:55 PM on October 30, 2014 [1 favorite]

Response by poster: To you, what is the different between full and partial coverage that makes full coverage worth it?
posted by bbqturtle at 1:57 PM on October 30, 2014

Can you afford a new car if you total your current car?

Increase your deductible, if you want to reduce your premium.
posted by politikitty at 2:01 PM on October 30, 2014 [9 favorites]

I was just thinking about this.

- I'm in LA, so often share the roads with $100,000+ valued cars. These people also have lawyers. Getting in an accident with one of them (one once hit me when I was in a rental) suuuuucks.

- Medical expenses on either side. Easily $100k+. Heaven forbid.

- Covers me on any rental when traveling.

- Pays for a rental if I'm in an accident.

- Replaces my car if stolen.

- I've had several hit-n-runs / uninsured driver incidents. Thus also sucks, but it soooo much easier to deal with if you have full coverage.

40% of the drivers in LA are unlicensed, uninsured, or under-insured. YMMV where you live, but for me, full coverage is a necessity.

My car is not worth nearly what yours is, I own my vehicle free and clear. I guess I'm paying for peace of mind.

Also, for business reasons, I can't drive with cosmetic damage to my car. So there's that benefit, too.
posted by jbenben at 2:07 PM on October 30, 2014 [2 favorites]

You pay off the car, drop full coverage, and save $X a month (where X is likely under 50 bucks a month but maybe you're right and it's 100 - I'd check)

One of two things happens.

One, you don't have an accident and you save this money.
Two, you have an accident and now you don't get enough money in insurance payout to replace the car.

If two happens you now either buy a lower value car (which is more challenging at 9k) or you end up with a whole new loan. So if two happens in 3 months you only saved 3X AND you were pushed into a new purchase & acquisition of new debt. And your rate goes back up (or up notably higher because you buy new and now you're insuring 15k, say)

Me, personally, I wouldn't do it. I think if you want to realize some savings on your car insurance you're way better off raising your deductible. Often there's a sizable savings just bumping up one notch (maybe from $500 to $1000) that's far more easy to absorb the risk.

I think the far more profitable move is to keep the cushion and, if you can accept the risk, write that $7000 check into the student loans before they stop being deferred. It's a less visible option to you since you're not getting that $100 a month payoff but it's a way bigger interest savings. And it has the advantage that you don't have to do it right now - you have time to increase that cushion with no additional interest cost since you're still deferred.
posted by phearlez at 2:14 PM on October 30, 2014 [1 favorite]

To my mind, it kind of depends what you mean by reducing your coverage. Do you mean being able to drop comprehensive? I'm assuming that's the case, because your lender's main concern here is that if your car gets damaged or totaled or stolen they want to know that they're going to get their money back, which is what comprehensive will cover and which is more than the minimum that state govts. require all drivers to carry.

It's a tough call, but if you would be in a deep pit of despair should your car get totaled in a hit-and-run, or stolen, or have a tree fall on it in the middle of the night, you really should keep your comprehensive coverage. I had a car totaled about 7 years ago in precisely the last scenario, and our rates did not go up significantly despite the $9,000 claim. I've just known too many people who wind up making a major claim on their comprehensive insurance over the course of 20-30 years of driving. Your risk in any given year is low, and it still comes out in the insurance company's favor, but it's not trivially low.
posted by drlith at 2:32 PM on October 30, 2014

I looked into dropping the comprehensive coverage from my policy when I paid off my car loan. It didn't drop the costs by much -- I think it was less than 25% of my overall costs to insure my car.

I would check with your insurance carrier to see what your actual savings would be. They may be less than you think. Also, I would shop your policy to other insurers -- your credit union requires specific coverage, but hopefully they can't dictate what insurance carrier you use (mine didn't), and there might be a cheaper option for you. $200 is what, $2k/year if you pay 10 monthly installments? That seems high to me, esp. on a car worth $9K.

And as people have said above -- only reduce your coverage if you're able and willing to replace your car in the event that it gets totaled (aka willing to self-insure).
posted by pie ninja at 2:35 PM on October 30, 2014

Best answer: Aye, crap, Michigan. That is hugely important.

My credibility: I worked in auto insurance for 7 years, I'm now a Wife. I worked specifically on Michigan for a while. Bodily Injury/Property Damage is generally referred to as Limited/Liability only coverage; adding Collision/Comprehensive is what makes it "Full Coverage." UM/UIM/Med Pay can be included for either.

Ok. So most of the time, in any regular state (by which I mean not Michigan), I personally think it's fine to drop Collision coverage, but not Comprehensive. Collision is generally the coverage that pays if it's your fault and you wreck your car. Comprehensive pays if a tree falls on your car, if it's stolen, stuff like that.

Collision is expensive. Comp is usually not. We do not have Collision coverage because the cost-benefit for our 10 year old car isn't good enough - if we get into an accident that's our fault, tough cookies - we'll be dealing without a car for a while.

In any regular state, the at-fault party's Property Damage coverage pays to fix the not-at-fault party's car. If that at-fault party's PD coverage isn't enough, sometimes your UM/UIM/Collision can get used. This depends on the contract you have with your insurance company.

In Michigan, doesn't matter whose fault - YOUR Collision coverage pays for YOUR car to get fixed.

KEEP THE COLLISION IN MICHIGAN. You're hosed if you get into an accident otherwise.

This may not have been the most elegantly written answer. If you have questions, let me know.
posted by Ms Vegetable at 2:41 PM on October 30, 2014 [5 favorites]

from what I can tell, auto insurance doesn't actually help you, it just lends you the money to make repairs that you pay back in increased premiums

This is ... not really true. I mean, I guess if you squint hard enough, all insurance could be described that way, but that's not why people buy insurance. The benefit is that it shifts the RISK away from you and onto the insurance company, in exchange for a predictable monthly payment.

It sounds like you could afford to have a much higher deductible than you have right now. So I would call your insurance company and raise the deductible to something like $1k+, if you typically have at least that amount floating around in ready cash. That should decrease your premium payments.

I would probably not drop to state-minimum / liability-only insurance, though, if you need your car to survive (get to work, whatever). Scenario: you drop to liability-only insurance to save a few bucks, figuring you have enough in savings to replace the car if something happens. Something happens, car gets totaled. You have to blow your savings for a new car. Getting comprehensive insurance on this car is suddenly very expensive, because you've just wrecked, so you don't get it, leaving you very exposed if something else happens: you're now one more car wreck away from being screwed.

In contrast, if you keep a (high-deductible) comprehensive policy, and then something happens, the insurance company would cover it (after the deductible). You might find that your premiums would be high afterwards, so you might decide at that point not to continue comprehensive coverage, understandably. But at that point you'd have more in savings to cover a potential second incident, should it occur, than in the first scenario. So you could withstand that second hit of bad luck without being ruined. This is safer.

So: I don't think the insurance is without value. If you couldn't get to work without a car (and especially if the car can't be a $500 beater, because you live somewhere with a hard winter), then the downside risk to not having a car is very high. It could be worth a few extra bucks a month to shift that risk to someone else.

But comprehensive shouldn't cost $100/month; that seems steep. My guess is you will lower that quite a bit with a higher deductible. And if it doesn't, I would shop around to some other insurance companies and get quotes for similar coverage. It's always possible you're getting screwed.
posted by Kadin2048 at 2:45 PM on October 30, 2014 [1 favorite]

I would only drop collision coverage if you could pay cash for a comparable car without breaking a sweat, AND if the car were worth something like $3,000 or less.
posted by randomkeystrike at 2:48 PM on October 30, 2014

Me and my partner are both just on the cusp of that turn-25-rates-drop thing, neither of us had ever been in an accident. I got in a single vehicle accident avoiding someone who ran in to the street, where i hit a curb and ended up causing a bunch of mechanical damage to the car, but basically no cosmetic damage besides the rim being a little wonky. The repair cost ended up being like, 3/4 of the value of the ~10 year old car.

But, she had full coverage, so we just got a check and i went out and bought a very similar car in if anything nicer shape. But, it had to be filed under the collision not the comp. Which is to say, i would have been FUCKED if there wasn't full coverage insurance.

When she got insurance after that, it was still way cheaper than mine for the same coverage at the same age. If it went up at all, it must have been like $5-10 a month.

I'm never getting anything but full coverage again unless i'm driving a $2000 or less beater. The increase in rates is WAY less than what they pay out. The only time it makes sense to not have that coverage is if you have a ton of disposable cash laying around. And even then, i'd argue that i can't see how it would possibly make financial sense.

It has never, ever seemed like the "you pay it back in payments" thing to me. So you're paying $2400 a year in insurance. The car is worth $9k. If you have to replace the car out of pocket, that's at least 3 years of payments. In 3 years the car will be worth what, 7k? That's still several years of payments.

Do you see where i'm going with this? $100 is a big drop, but it just doesn't feel like enough to me to justify having to pay out of pocket and nuke your rainy day fund or take out a new loan and start the treadmill again.

I also bet at the end of the loan you'll be able to find similar insurance for less money from another provider, or something. I always get the feeling that loan-mandated insurance is more expensive just like an sr-22 or something because they know its mandated.
posted by emptythought at 3:07 PM on October 30, 2014 [1 favorite]

If you have enough money socked away that you can consider just writing a check to pay off the car, one thing you could do is go to your DMV and ask what your alternatives to insurance are for your state. In some states, you can set aside a bond as proof of financial responsibility. Googling is not readily turning up an answer for me as to whether or not you can do this in Michigan, but here are a couple of links with some general info:

What is bond car insurance
Alternatives to car insurance

I have no idea if the bond will allow you to tell your lender "I am covered." So I have no idea if you would have to pay off your car first and then do this too, which might make it too much dough for you. But if it allows you drop the insurance outright and sock away another $200/mo for savings and investments, you could sit down with a financial planning program and run some numbers and see if this makes sense to you as a "I can have a sure thing of x amount of dough now that I can save and invest or I can pay insurance and sort of hope I get in a wreck so they pay me enough money some day to feel okay about giving them $200/mo."

Disclaimer: I worked in insurance for more than five years. I did not work in car insurance. But, having seen what the business model is, I plan to do everything in my power to find non-insurance answers for things typically covered by insurance for the rest of my life.

posted by Michele in California at 4:07 PM on October 30, 2014

From your description I wouldn't bother paying off the car. I would first try a different insurance company. If you want to analyze this you need to know what the difference in coverage would result in worst case. If your liability stays the same than I suppose that is the Total value of the car, (the max the insurance would pay you in the event of an accident,) with that you can decide if you are willing to take the risk. For example if the Total for the car is 15K you have to ask yourself if 1200 a year is enough for an investment where you can lose the whole thing. Would you make this bet where your maximum upside was just 8 percent of your maximum downside? How many years of savings would it take to get a 50% return?
posted by Pembquist at 4:55 PM on October 30, 2014

Raise the deductible. Don't pay off the car. It's something that people argue about, but I feel there is value in having a large chunk of money.
posted by doctor tough love at 5:03 PM on October 30, 2014

Eh, yeah, I don't carry collision but I drive a car that's worth like $2,000. If I had a car worth $9,000 I would definitely carry collision. I have had my license for 10 years without a single accident until last week when I rear ended someone like an idiot (luckily there wasn't much damage). Your status between someone who doesn't need collision and someone who does can change fast and 9k is a lot of money to be out thirty seconds later.

That said, I'd definitely call around to other insurance companies. Every insurance company I've had has raised my rates after 6 months or a year for no discernible reason. I just call other companies until I get a lower intro rate. I'd be wiling to bet you could get that old rate by switching companies.
posted by geegollygosh at 6:07 PM on October 30, 2014 [1 favorite]

Dude, listen to Ms Vegetable if you are in a no fault state. Michigan insurance is vastly different than anywhere else. If I get hit by someone in California and they have insurance? I can claim against them. If I get hit by someone in Michigan it doesn't matter what insurance THEY have, it's MY insurance that matters. So I'd keep a pretty snazzy insurance plan. Especially considering all of the Michigan extras like snow... freezing rain... sleet... snowplows... salt... mooses...

Moose may only be an issue in the UP...
posted by elsietheeel at 6:56 PM on October 30, 2014

If you have a ton of savings and are a cautious person, it's likely you'll come out ahead over a lifetime if you never buy insurance for things you can easily cover out of savings.

Since you have $30,000 in debt, you don't have enough savings that you can easily purchase a car if yours is totalled. Unless you're willing and able to go car free at that point, you won't save money. And if you're willing and able to go car free and looking to go car free, sell your car.
posted by akgerber at 11:11 PM on October 30, 2014 [2 favorites]

Response by poster: Thanks everyone! I will look into raising my deductible and finding a new, cheaper insurance company :)
posted by bbqturtle at 5:10 AM on October 31, 2014 [1 favorite]

For the sake of anyone coming in here with a similar question - Florida uses the same no-fault methodology.
posted by phearlez at 7:29 AM on November 1, 2014 [1 favorite]

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