We recently published an article about the claim adjustment process insurance companies use. In it, our example consumer “Martha” decided to purchase collision coverage so her insurance would provide “financial protection against physical damage resulting from traffic collisions.” This expensive form of insurance is optional in the state of Florida; however, lenders often require it. If you own your vehicle outright, how would you decide whether or not to purchase collision insurance?
Here’s how our Martha did it.
Let’s say that she has paid off her $20,000 loan for her Mustang. It was suggested that she could save money by dropping collision insurance. Before doing so, she used a formula to determine whether or not it is worthwhile paying the premiums for collision coverage. First, she added up the annual premium and the deductible, and then subtracted that total amount from the actual cash value (ACV) of the car.
Here’s the math: Martha’s premium for collision insurance is $1,000 per year and her deductible is $1,000. It will cost her $2,000 (premium + deductible) to get $20,000 (the actual cash value of her car) out of the insurance company in the event of a total loss, for a net of $18,000 (the value of your car minus the premium and deductible) in her first policy year. This math makes the purchase of collision insurance sensible. On the other hand, if her car were older with an ACV of only $3,000, it would cost her $2,000 to get $1,000 of repair in year one, and an additional $1,000 for each added year of coverage. In this scenario, buying collision coverage really doesn’t make sense, especially considering that the vehicle’s ACV decreases each year. If you need help determining the ACV of your car, an auto dealer would be able to assist you.