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Home > Personal Finance > Self Insure To Save On Car Insurance

Self Insure To Save On Car Insurance

No doubt you’ve seen those commercials/ads for countless companies claiming they can save you money on your automobile insurance. It makes me wonder which companies are still left charging too much? Anyway, those ads always make me think about what saving money really means. I don’t think that you can save money by buying something. Well, maybe once I saved money by buying something in a Macy’s store. When I got to the checkout counter, the clothing I purchased rang up lower than what I expected. I lowered my automobile insurance premium by eliminating coverage. This may work for you. First a summary of what is included in a typical automobile policy (this is not complete, but good enough for now).

  1. Liability Coverage – Insures damages you cause to other persons or property.
  2. Health Care Coverage – Insures your own injures when you are injured in an automobile related collision.
  3. Collision/Comprehensive – Insures your vehicle against damages you cause, or other damages unrelated to an automobile collision.

The first two types of coverage (1) and (2) are coverage you will want to carry. In a future post, I will discuss how I reduced the premium for these types of coverage. The third type of coverage (3) only affects your vehicle – the maximum payoff is the depreciated value of your vehicle. If you eliminate the coverage, you will be on the hook for any damages that occur – so that’s why it’s self insurance if you forgo the policy.

If you have a loan on the vehicle or are leasing the vehicle, the title holder (not you) will require you to have coverage to protect their financial interest. So the first check is to make sure you have clear title to the vehicle.

Chances are if you have owned vehicles before, you have self insured one without realizing it. If you kept a vehicle for a number of years and have paid off the car loan, you probably dropped Collision/Comprehensive coverage because the value of the vehicle had dropped low enough such that the insurance doesn’t make sense (the payoff for a ‘totaled’ vehicle was near the cost of the premium + policy deductible).

I took this idea one step further by self insuring my vehicle well before it had depreciated to this endpoint. About (3) years ago, I was offered a renewal Collision/Comprehensive policy for my then (3) year old car. The coverage cost almost $500, whereas I estimated the value of the vehicle was about $8,000-$8500. These numbers didn’t make sense to me, because the premium didn’t in my estimation reflect the actual risk of loss for the vehicle. The vehicle is used for errands and day trips only – no commuting. After doing the math, I decide to go for it.

But, it takes a certain amount of financial security to pull it off. Here’s why: The vehicle needs to be paid off. In my case, I had already paid off the $7K loan. Also, you need to be in a position to ‘pay the loss’ on your ‘policy’, either by having cash to buy another car or potentially take out another loan.On the benefit side, I gain the following as illustrated in this table (the car value is estimated using Kelley Blue Book [kbb.com], the policy premiums are estimates from my automobile insurance company):

Year

Car Value

Policy Premium

Deductible

Max Loss Payoff

1

8,000

500

500

7,000

2

7,000

450

500

6,050

3

5,000

350

500

4,150

4

4,500

350

500

3,650

5

4,000

300

500

3,200

Total Savings

1,950

Each year, I gain the savings from not paying the premium. Also, as the vehicle depreciates, the loss potential is reduced – this isn’t savings in your pocket but can be looked as reducing the cost of ownership and increasing the money available for your next vehicle.

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