Just about 2 years ago my wife and I decided to get rid of both the collision and comprehensive coverage on our cars. We still had car insurance (including the max amount of liability coverage), we just stopped paying for those particular parts of the coverage.
Which might be surprising if you’ve spent any time here, given how much I love insurance and how much of it I have.
But as strongly as I feel that having the right insurance is essential for any young family, I feel just as strongly that insurance can be a waste of money when it’s not used correctly. That’s one of the reasons why I think whole life insurance is a bad idea for most people.
So today I’d like to explain our thought process for doing away with collision and comprehensive coverage, and evaluate whether that decision has held up as a good one after two years.
First, what is collision and comprehensive coverage?
If you take a look at your car insurance policy, it will look something like this:
It’s basically a list of different type of coverages, each of which has its own cost. It’s really more like a bundle of insurance products rather than one single product.
In that list, collision and comprehensive coverage are two of the items.
Collision basically covers any damage that happens to your car while you’re driving it. Any typical accident would fall under your collision coverage.
Comprehensive basically covers any damage that happens while you’re not driving you car. It also covers all glass damage and any damage resulting from hitting an animal (even if it’s while you’re driving).
The logic behind both is that your car has value that you want to protect.
Why did we get rid of them?
We had two cars at the time: my 1998 Honda Civic and my wife’s 2004 Scion XA.
We had used Kelly Blue Book to estimate the value of my car at about $2,000 and my wife’s car at about $3,500. We also had a $1,000 deductible for each, meaning that we’d pay up to $1,000 worth of damages before the insurance company chipped in. So what that meant was that even if both cars were totaled, the maximum value we would get out of our collision and comprehensive coverage was $3,500.
Meanwhile, we were paying a combined $449 per year for collision and $381 per year for comprehensive. A total of $830 per year for the two cars.
So our thought process essentially looked like this:
- At $830 per year, in just over 4 years we would pay more in premiums than the maximum value we could ever recover from that coverage. And those premium payments were guaranteed, even if neither of our cars were ever damaged in any way.
- Most accidents would fall under the $1,000 deductible. We would have to face significant damage before the coverage even kicked in. We could lower the deductible, but that would simply raise the premium.
- If we canceled coverage, the absolute worst case scenario was both cars immediately being totaled, costing us $3,500. But if that had happened, we had the savings that could have handled it.
Because our cars were older and therefore not worth much, and because we had the savings to handle the worst case scenario, we chose to give ourselves the probability of saving money by not paying for the insurance. The risk of going without coverage was small and the potential savings was several thousand dollars. It actually ended up being a pretty easy decision.
(Full disclosure: we’ve since bought a 2007 Honda Odyssey, conservatively worth about $11,000. Because it’s worth more, we’ve decided that the coverage makes sense for now on that car. We still don’t have it on the Scion though. Basically, it comes down to the value of the car vs. the cost of the premiums.)
And then we had a claim!
A couple of weeks ago we woke up to the fact that someone had smashed in one of the Scion’s windows. Thankfully they hadn’t stolen anything of value, but still we had to replace the window.
That’s typically something that would be handled under comprehensive coverage. But we didn’t have comprehensive coverage. Which meant we had to pay $220 out of pocket to get the window fixed.
Which at first was frustrating. I found myself annoyed that I had to shell out the cash for something I could have had covered by insurance.
And then I thought about it a little more and realized that:
- $220 was less than the $1,000 deductible, so I would have had to pay it anyways.
- In any case, after two years we’ve saved well over $1,000 in premiums. Even with the $220 to replace the window we’re pretty far ahead.
Insurance is for the big risks, not the little ones
When I stepped back from the immediate emotional reaction, this incident actually served to hammer home an important point about insurance. Insurance is meant to protect us from the big, potentially devastating losses. It’s generally not cost effective to use insurance for small risks, like replacing a $220 window.
It’s also why I would choose a lower premium, higher deductible health insurance plan over one with a higher premium but no deductible. The high deductible lets us handle the small risks in a cost effective manner while still protecting us from the big losses.
In the end, nothing is guaranteed. My wife’s car could be totaled today, and if it was we’d end up losing money on the decision. But we have the savings to handle it, so it would be more of an inconvenience than a catastrophe. And the odds are that we’ll save money going this route, so all told I still feel good about the decision.
What about you? Do you have collision and comprehensive on your car? What are your thoughts on insuring big risks vs. small ones?