How to Choose Between Liability and Full Coverage
Choosing between liability and full coverage is like gambling. You always have to pay for a state-specified minimum level of liability coverage. However, if your vehicle is paid for, you have the option to decline full coverage. Full coverage consists of comprehensive coverage, which reimburses you for non-accident damage to your car such as weather damage, and collision coverage, which reimburses you damage to your car caused by an accident. If you estimate the maximum cash value of your car and the incremental cost of full coverage, you can determine the amount of risk involved with not having full coverage and the amount of the reward if you successfully manage that risk. Decide how much risk you are willing to assume to make the decision between liability and full coverage.
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Instructions
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Estimate the cash value of the car, which is the maximum amount of money you could receive from the insurance company and the amount of money you risk losing if you total your car and don't have full coverage. Use the Kelley Blue Book to determine a value for the car and subtract your deductible if you can't get the information from the insurance company. For example, the cash value of your car might be $3,500 with a $1,000 deductible for a maximum payout of $2,500. Write this value down and label it "V."
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Get an insurance quote with liability only and with full coverage. Subtract the difference in monthly premiums between the two policies to give you the monthly incremental cost of full coverage. For example, if liability coverage is $72 per month and full coverage is $120 per month, the incremental cost of full coverage is $48 per month. Write this value down and label it "C."
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Divide "V" by "C" and round up to the nearest whole number to give you the number of months it would take to save the full value of the car by not paying the comprehensive insurance premium. For example, $2,500 / $48 per month is 52 months. Write this value down and label it "X."
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Assess your tolerance for risk. Take each month number, "M," from one to "X," estimate the amount of money you will lose if you don't have full coverage and total your car as V - M * C and estimate the amount of money you win if you sell your car that month without totaling it as M * C. For example, if you go for two years without totaling the car, you are still betting $1,348 that you won't total the car that month. However, if you sell the car that month without totaling it, you "win" $1,152 in the form of full coverage premiums you never paid. The reward becomes greater than the risk in month 27 in this example.
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Decide if you are willing to take a gamble given the cash value and incremental premium cost of full coverage. Pay for liability for the number of months you are willing to assume the risk and potentially earn the reward. Pay for full coverage if you are not willing to make any bets.
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Tips & Warnings
Ideally, you should deposit the full cash value of the car into a bank account in order to pay yourself just as the insurance company would have done in the event you total the car and don't have full coverage
If you have comprehensive or collision claims that are less than the value of the car, the amount you "win" when you sell the car is reduced by the amount of the claim minus your deductible. For example, if your deductible is $500, and on month 24 you have a $1,000 claim and then sell the car, the amount you "win" is $1,152 - $500 = $652. If you have two $1,000 claims on months 12 and 24, the amount you "win" is only $152.
References
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