Car Insurance: When Full Cover Stops Being Worth It
Insurance never pays out more than the car is worth, less your excess. On a $4,000 car with a $500 excess, the most you could ever recover is $3,500 - and at $900 a year, under four years of premiums equals that. On a $12,000 car it takes nearly thirteen. Same policy, completely different value.
The ceiling on every payout
Collision and comprehensive cover pays for damage to your car. It never pays more than the car is worth, less your excess.
That is the number the decision turns on, and almost nobody works it out.
| Car worth | Most it could pay | Years of $900 premiums to equal that |
|---|---|---|
| $12,000 | $11,500 | 12.8 years |
| $7,000 | $6,500 | 7.2 years |
| $4,000 | $3,500 | 3.9 years |
Same $900 policy in every row. On the $12,000 car it is clearly good value - you are paying a small fraction each year to protect against a large loss.
On the $4,000 car you are paying nearly a quarter of the maximum payout every year. That is close to just saving the money yourself.
The problem is that it creeps
Nobody buys a $4,000 car and insures it for $900. They buy a $12,000 car, insure it sensibly, and then the car quietly loses value while the premium does not.
From the car insurance cost calculator, on a $12,000 car losing 15% a year:
| Year | Paid so far | Car now worth |
|---|---|---|
| 1 | $900 | $10,200 |
| 3 | $2,700 | $7,370 |
| 5 | $4,500 | $5,324 |
By year five you have paid $4,500 to insure something worth $5,324. The policy that was obviously sensible has drifted into questionable without anyone deciding anything.
Check this once a year. It takes two minutes and it is the whole of the decision.
What dropping it does not mean
This is only about collision and comprehensive - cover for your car.
Liability cover stays. That is the part that pays for damage to other people and their property, it is legally required, and the amounts involved can be enormous. Never drop it to save money.
You need the car’s value in savings. Dropping cover means writing the car off is your problem. If you could not replace it tomorrow, keep the cover regardless of what the ratio says.
Your lender may not allow it. If there is a loan on the car, full cover is usually a condition.
Raising the excess
A middle option: keep the cover, raise the excess.
Going from $500 to $1,000 puts $500 more at risk if you crash.
| Annual saving | Years to cover the extra risk | Verdict |
|---|---|---|
| $180 | 2.8 years | Reasonable |
| $120 | 4.2 years | Not really |
The test is simple: how many claim-free years does the saving need to cover the extra risk? Under about three is a fair trade. Over that and you are taking on real risk for very little.
And you must actually have the higher excess available in cash. An excess you cannot pay is not a saving.
Whether to claim at all
Claiming raises your premium, usually for several years. Small claims often cost more than they pay.
$1,200 of damage, $500 excess, and a premium that rises $320 a year for three years:
| Amount | |
|---|---|
| Payout | $700 |
| Extra premium over three years | $960 |
| Net | −$260 |
You are $260 worse off for claiming.
At $1,800 of damage the payout is $1,300 against the same $960, so you are $340 ahead - worth doing, but not by much. The break-even sits around $1,500 of damage here, and below it you are better off paying yourself.
Ask your insurer what a claim would do to your premium before you file. It is a fair question and they will usually tell you.
Once a year, check three things
- What is the car worth now? Look it up.
- What is the most the policy could pay? Value minus excess.
- How many years of premiums equal that? Under about four and it is time to think.
Then keep liability cover whatever you decide.
Work out your own position in the car insurance cost calculator - it shows the maximum recoverable, how the premium stacks up against the falling value, and whether a claim is worth making.
Common questions about car insurance cost
When should I drop collision and comprehensive cover?
When the premium gets large next to what the policy could ever pay. On a $4,000 car with a $500 excess, the most recoverable is $3,500, and a $900 premium equals that in under four years. On a $12,000 car it takes 12.8 years, which is clearly worth keeping.
What is the most my policy can pay out?
The car's current value, minus your excess. Not what you paid for it and not what it would cost to replace. On a $12,000 car with a $500 excess that is $11,500 - and it falls every year as the car loses value.
Should I raise my excess?
Only if the saving covers the extra risk quickly. Raising it from $500 to $1,000 puts $500 more at risk. At $180 a year saved that breaks even in 2.8 years, which is reasonable. At $120 saved it takes 4.2 years, which is not.
Should I claim for small damage?
Often not. On $1,200 of damage with a $500 excess, the payout is $700 - but if your premium rises $320 a year for three years, that costs $960. You would be $260 worse off for claiming.
How do I know what my car is worth?
Check a valuation site for your exact model, year and mileage, and check it yearly. Insurance value falls as the car does, so a policy that made sense three years ago may not now.