SSP’s Matt Miller: Reducing Coverage On Older Cars Can BackfireOctober 10, 2012
Should you drop coverage when a vehicle reaches 7+ years of age? Two major factors are challenging traditional wisdom and the costs involved are not always limited to the physical damage of the vehicle.
A common practice amongst vehicle owners is to drop physical damage from their insurance when the vehicle reaches 7 years of age. Due to potential premium savings, insurance agents receive little resistance from their clients when making the suggestion. While there is logic to this advice, it is not universally applicable and should be considered carefully so that drivers don’t lose valuable coverage.
Generally speaking, the 7-year rule of thumb assumes that a car’s value will drop to a negligible value over time. If true, the vehicle’s value would be negligible with respect to the average deductible so it makes little sense to insure against physical damage. That being said, two major factors are challenging traditional wisdom. First, auto manufacturers across the board have dramatically increased their quality standards. Quality has improved so much so that several companies offer 10 year/100,000 mile warranties, ultimately extending the value of a vehicle further in time. Second, economic conditions have resulted in an increased demand for used vehicles. As consumers shy away from new vehicles, used car prices have naturally increased. These factors have made it unwise to assume that a vehicle’s value is “negligible” just because it’s reached the 7-year point.
Additionally, while a vehicle’s value is the primary consideration in considering physical damage coverage, indirect losses and convenience factors must be considered. Damage to a vehicle may result in towing expenses and the need for a short-term rental vehicle during the adjustment and repair process. Such expenses can add up quickly if the damage is severe. Further, non-monetary costs can be incurred by the self-insured as they navigate the process of getting a vehicle towed, securing a rental, and obtaining repair estimates. Given that some insurers offer “concierge” claims services, handling the entire process from start to finish, valuable time and energy can be lost when coverage is dropped.
One Sterling client’s recent experience demonstrates what can be the enormous value of keeping physical damage coverage for an older vehicle. While driving a high mile 1995 sedan, the client was involved in an accident that rendered their vehicle inoperable. After the accident, the claim was reported to the insurer and the vehicle was towed to a claims center. The insured was provided with a rental vehicle and returned back to his place of work in just 90 minutes from the time of the accident. Due to severe damage, the vehicle was considered to be a total loss. Despite having a $500 deductible, our client received a total of $1,600 in reimbursement from the insurer due to the vehicle loss and towing expenses. Further, the client was provided a rental vehicle which was paid for directly by the insurer. Without physical damage coverage, the loss would have easily cost the insured $2,000, not including the time that would have been spent dealing with the accident on his own. Amazingly, the client and was paying a mere $100 annually for physical damage related coverages.
To be sure, there is a diminishing return to insuring a vehicle for physical damage. Still, the premium costs of doing so must be weighed against the potential loss that you can face. The 7-Year rule of thumb is certainly not a reliable standard these days. Insureds would be well advised to consider the following four questions as they weigh their decision: 1) What is your car worth and how much would it cost to replace it with something similar? 2) If you have a loss, are you able to bear the financial costs to repair it? 3) Do you wish to oversee the estimate and repair process alone? 4) Is the premium to insure against such losses offset by the value you’ll receive in the event of a loss?