Insurance doesn't depreciate like a car does

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Question: Should your full coverage auto insurance costs depreciate every year as your car does? 

Answer:  Your belief that as your vehicle depreciates in value the cost to carry physical damage coverages of comprehensive and collision (referred to full coverage by some) would decrease as well makes sense in theory, but it doesn't necessarily hold true in reality.

It's correct that as a vehicle depreciates, the actual cash value that an auto insurance company would pay out if the car were totaled would go down.  But a two-year-old Honda Accord is probably just as expensive to repair to its pre-accident conditions as a brand-new one would be.

The value of a vehicle is only one factor car insurance providers use to calculate your full coverage premium. 

There are other key issues that could balance out any decrease in premium that you'd receive from having the value of your car depreciate, and thus your rates may remain the same or even be pushed higher.  (See " Insure your car from showroom to junkyard ")

For instance, many car insurance companies offer a new car discount , typically up to 10 percent on collision, for an insured vehicle that is three years old or newer. Once your vehicle is four years old, your rates may drop by 5 percent because the value is less, but now that your 10 percent discount is gone you won't see a lower premium.

Some items that could push your collision and comprehensive coverages higher instead of lower (or keep them the same) include:

  • If your year and model vehicle is a top stolen vehicle in your area.
  • The cost of repairs and parts is high.  Parts may be hard to find for your particular model vehicle, in which case your auto insurance provider would charge more to cover these high costs that it could potentially incur.
  • If collision claims frequency and payments for your vehicle are high.

The Highway Loss Data Institute (HLDI) allows you, and auto insurers, to see which cars are better or worse than others in the same class of vehicle, regarding the frequency of claims and average payment per claim type. 

For example, if collision claims frequency and payments for your seven-year-old vehicle are higher than those of a five-year-old vehicle of the same model, your full coverage costs could be higher. 

Keep in mind too that if you change anything else on your car insurance policy, it will also impact your rates.  Risk factors typically include your age, your location, driving record, occupation and miles driven per year.  Changing any of these factors, or adding more drivers to your policy, will change your overall car insurance rates.

Auto insurance companies' rating systems vary widely for both the liability and physical damage portions of a policy.  Comparison shopping will allow you to see which auto company will give the best rates for your specific set of rating factors, including the particular vehicle you own.  

At some point, it may be wise to ditch comprehensive and collision on your older vehicle -- if you own it outright.  (See "Is it time to drop comp and collision" for guidelines on when to remove the coverages)  When you make that decision, be sure to shop around again for the cheapest car insurance rates for your needs.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Personal Finance , Insurance

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