My Car Is 10 Years Old. Should I Drop to Minimum Coverage on My Car Insurance?
Reducing your car insurance to minimum coverage could save you thousands on premiums. But when is it worth the risk?
Question: My car is 10 years old. Should I drop down to minimum coverage on my car insurance?
Answer: The 10-year mark is a good time to re-evaluate your car insurance needs, but there's more to making coverage decisions than your car's age alone. The national average cost of full coverage car insurance is $2,697 while minimum coverage averages $820, according to Bankrate,.
Dropping your coverage has the potential to lower your insurance premiums by around $1,800. Whether that $1,800 per year in savings is worth the increased risk you face by not having comprehensive or collision coverage will depend on a lot of factors. Here's what you need to think about before you decide.
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Find out how much you, personally, would save by switching to minimum coverage
At a certain point, the premiums you pay for full coverage aren't worth the payout you'd get if your car were totaled. The first step to figuring out if you've reached that point is figuring out the dollar amount you'd save on premiums each year.
You could be looking at around $1,800 per year in savings based on national averages. But it's a good idea to check with your insurer to get a more precise estimate.
Each state has its own minimum coverage requirements, and the insurance rates you pay depend on so many different factors that your premiums could be significantly higher or lower than the national average.
In some cases, you can use your insurer's online portal to get instant estimates on premiums based on different coverage scenarios. If your insurance provider doesn't offer that, call and ask how much your premium would be if you reduced coverage to the minimum requirements in your state.
Once you have that number, you know how much you would save by switching car insurance. The next step is to figure out how much financial risk you're exposing yourself to by dropping coverage. That part isn't quite as straightforward.
Use the tool below, powered by Bankrate, to explore and compare some of today's top auto insurance offers:
How much can you expect your car insurance to pay?
To decide if full coverage is worth its weight in premiums, you need to estimate the maximum payout you would receive if your car were damaged by something covered in the comprehensive or collision coverage you're thinking about dropping. To do that, answer the following questions:
What is the current fair market value of your car?
This is roughly the amount your insurer would pay if your car is totaled. In other words, it's the most you could ever expect to get paid after an accident. You can use tools from sites such as Carfax or Kelley Blue Book (KBB) to get an estimate.
How much do common repairs cost for your car?
In the 10 years you've owned your car, you've probably had to make some repairs to it. Dig through your records and note the amount you paid for different repairs. Note that inflation is raising the cost of car repairs, as well, so plan for those same repairs to cost a little more in the future.
You should also look up estimates for other common types of damage you'd need to get repaired after a car accident. That includes body work such as repainting, patching dents or scratches, or replacing broken fenders and headlights. It also includes internal repairs such as fixing leaks and damaged engine components.
How many years of saved premiums would it take to reach that maximum payout?
If you don't want to do the research on the cost of repairs, another way of thinking about the value of full coverage is how long it would take you to save up the maximum payout yourself.
Let's say your current fair market value is about $10,000. At an average of $1,800 per year in saved premiums, it would take you more than five years to save that $10,000 yourself. If the estimated value is only about $5,000, however, you'd have that cash saved in under three years.
Based on those estimates, how quickly would the cost of repairs outweigh the fair market value of your car? Remember, your insurer will total your car if the cost of repairs after an accident is more than the fair market value of your vehicle.
If fixing a headlight or replacing a radiator would be enough to put your repair costs above that value, your "full coverage" car insurance isn't really providing much coverage. But if the fair market value is still high enough that the repair cost from minor accidents wouldn't risk your car being totaled, full coverage still provides some value.
How much longer do you plan to keep this car?
The next factor to consider is how many more years you plan to drive this car and your plans for buying the next one.
If you plan to drive this 10-year old car into the ground, you might well have another 10 years of driving left — but you probably aren't expecting a huge payout or trade-in value when it comes time to get a new (or new-to-you) ride.
In that scenario, dropping to minimum coverage now and stashing that $1,800 or so per year of saved premiums into a high-yield savings account or CD account would give you a nice nest egg to put toward your next car when you finally retire old reliable.
If your car is damaged in an at-fault accident before you're ready to trade it in, you can use those savings to cover the repairs out of pocket and still have time left to rebuild your savings for your next car.
If you plan to upgrade in the next couple of years, you might hope for a decent sale price or trade-in value to put toward your next car. In that case, keeping full coverage probably makes more sense.
The $1,800 or so per year you'd save won't build up fast enough in a year or two to make up for the risk of your car being totaled and leaving you with no cash on hand to put a down payment on something new.
Use the tool below, powered by Bankrate, to connect with a financial professional who can help you build a financial plan to reach your financial goals:
Situations when you should never drop to minimum car insurance
While there are some scenarios in which the saved premiums are worth more than the value you're getting from full coverage car insurance, there are a few situations where it's never worth the risk:
- You're leasing the car. Leasing agents typically require full coverage as part of the terms of the lease.
- You're still paying off a car loan. Full coverage is sometimes required by lenders. Even if it isn't, if you're still paying off this car, your financial risk in an at-fault accident is high. If your car is damaged beyond repair, you could be left paying off a loan for a car that's sitting in a junkyard while also taking out a new loan for a new car.
- You have a luxury or exotic car. If you're driving your dream car, you really don't want to risk being underinsured. Specialty repairs are more costly, and replacing that car in an accident isn't always as straightforward as heading to your local dealership. Even higher rates of specialty coverage are still likely low enough to be worth the peace of mind that you'll be paid the full cash value of your specialty vehicle if anything were to happen.
Is minimum coverage right for you?
The right time to reduce your coverage to the minimum car insurance required by your state might be today, or it might be never. The answer depends on how much you're paying, how much your insurance would pay you in a covered accident and how much risk you're willing to expose yourself to for the remaining years you plan to drive this car.
With that said, if you drive a car long enough — and it isn't a rare or specialty model — you'll probably reach a point that the maximum payout you can expect from a full coverage policy isn't worth the thousands per year in extra premiums you're paying for that coverage.
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