Tuesday, March 17, 2009

Collision Insurance on Cars

Until recently, I hadn’t thought much about the collision part of my car insurance. When my car insurance renewal papers arrived, I puzzled over them for a while trying to see if there was any way to reduce the premium.

To figure out whether it’s worthwhile to carry collision insurance, you have to know how much the insurance company will pay in the event of an accident. You’ll never get more than the write-off value of the car. Even though you might not want to get a new car, the insurance company won’t fix a car if the repairs cost more than they think the car is worth.

My car is getting older, and based on what the insurance company representative told me on the phone, my best guess of its write-off value is about $5000. I also have a $2000 deductible, and so the most the insurance company would ever pay me for my car is $3000. The fact that it is worth more than this to me is irrelevant.

For this $3000 of coverage I would have to pay $309. I doubt that the odds of writing off my car over the next year are over 10%, and since I can afford $3000 (in addition to the $2000 deductible) the collision insurance isn’t worth it to me.

One part of all this that I can’t understand is that the collision insurance on my car is actually higher now than it was when the car was new, even though its write-off value was considerably higher back then. Any insights from readers would be appreciated.

11 comments:

  1. I also dropped my collision insurance as the car aged. Consumers don't learn to think in terms of probabilities.

    When you pay for collision insurance you are betting you will hurt your car and the insurance company is betting you won't. Placing that bet when the maximum payoff is 10:1 is an absurd price to pay. The exception is for someone who simply cannot afford to replace the car, if it were totaled.

    Rising costs for insurance: Perhaps it's just labor. Any repair is now a costly repair. On the other hand, it could be insurance companies taking every last penny they can get from their customers.

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  2. Mark: I fear that you may be right about insurance companies extracting every last penny. I'm still looking for an authoritative and unbiased source of information about car and house insurance. I just don't trust anything information source that doesn't explain the nastier practices of an industry along with the good things the industry does.

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  3. Some possible reasons your collision coverage costs more: you are statistically more likely to be in an accident, there will be more damage (unlikely), you are subsidizing other drivers, or you are getting fleeced. Perhaps because people with older cars are less likely to examine their coverage? If I've owned a car for ten years, I might be less likely to notice any particular line on my policy because it's just not interesting anymore.

    Also, could be that because you are more likely to have your car written off (less damage required, so less serious accident), you are forced to bear more of the administrative costs of the insurance company's adjustment division: adjusters, towing, salvage auction, etc.

    I'm just speculating, seems to me collision should be cheaper on older vehicles.

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  4. Gene: That's a good list. Any combination of those possibilities is plausible. There must be people who actually know the answer. I'd like to have a chance to ask a person knowledgeable about car and house insurance a few questions.

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  5. Ah, I didn't read the previous comments before I posted mine. Mark might have touched on the main reason. People with older vehicles are less likely to be able to buy a replacement without the proceeds from their collision coverage.

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  6. Gene: Maybe I'm being a little slow here. Are you suggesting that people with older cars are more likely to defraud insurance companies to get money for a new car? If that turns out to be the main reason, it means that there is an awful lot of fraud.

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  7. Actually, I was suggesting they don't have the option of dropping collision coverage because in the case of an accident, they need the proceeds from their insurance to purchase their next vehicle. I'm guessing that they might not have a lot of money set aside, perhaps because they have lower income. A lower income would also limit their access to credit.

    I hadn't thought of the possibility of fraud, but maybe that's a good idea for replacing my 1994 Ford Taurus. :-)

    Fraud may actually be part of the reason rates are higher. Imagine you had a $1500 repair bill for your 15-year-old car that the insurance company would give you $3000 for if you wrote it off, but would only sell for $2000 if you paid to have it repaired. It might be tempting to drive it into the river for the $3000 write off.

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  8. Sorry, I may still have not made myself clear. I was inferring that since owners of older cars may statistically need the collision coverage, the insurer can charge more for it.

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  9. Gene: I suppose it's plausible that many people are pressed for money and couldn't afford to replace their cars without insurance money regardless of how much the car is worth. This might explain why people keep collision coverage even when it is overpriced on older cars.

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  10. In terms of an unbiased source of information about insurance companies, try a price comparision service. Many of these companies collect fees from insurance companies to insert them in their search engine, so when they are competing with 40 plus companies for a car insurance quote its not in their interest to fudge figures.

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  11. I also dropped my collision insurance as the car aged. Consumers don't learn to think in terms of probabilities.

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