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Posted: 1:22 p.m. Friday, April 20, 2012

Full coverage or just liability insurance on your auto?

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By Clark Howard


Should you have full coverage, or just liability coverage, on your vehicle? It depends on the car!

For example, a recent poster on our Facebook page asked if she should be paying for full coverage on her fully paid 2005 Toyota Tundra. Here's the bottom line: If you own a vehicle that's still worth a significant amount of money, you absolutely want comprehesive coverage. So in this case, since the vehicle still has plenty of value remaining it it, it should be fully insured.

Now, you always need liability insurance, as that protects your assets in the event of an accident that's your fault, or appears to be your fault.

But when cars get about 8 years old or older, that's the time to start looking at the math for the collision and comprehensive. At some point, it becomes wiser to just become your own insurance company.

There's a rule of thumb: Take your monthly premium to for the collision and comprehensive insurance. Multiply it by 12 (or by 4 if you pay quarterly) to determine your yearly cost. When your yearly cost for C&C becomes greater than 10% of your car's current value, that's the point at which you can remove the full coverage, and just pay the liability premium.  This math is based on the law of averages for accident claims.

Now of course, for some unlucky drivers, this could come back to bite you. Let's say you remove your C&C, and just a few weeks later you total your car. In that scenario, my advice would prove to be rotten, because you'll be liable for the expenses on your own. Statistically it's unlikely, but it happens. If you are someone who does not have a good savings buffer, you would be better served to hold on to your C&C for a while longer, either until your car depreciates significantly, or you until you get a little more saved up.

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