Six times it's OK to drop insurance

In some instances insurance coverages overlap, such as AAA and roadside coverage on your car insurance policy. Having an informed overview of what you're covered for can help you save on premium payments. 

David Gray/Reuters/File
It's a good idea to annually review what insurance coverage is best for your needs.

If you really want to be safe, you could buy insurance for just about everything in your life. You can insure your car, home, life, possessions, and can even buy insurance to cover your funeral costs. But with all of that money going out the door, you might not have enough left over to enjoy those things you're insuring.

Sometimes, the costs of insurance outweigh the benefits, and the money spent on premiums could be better spent elsewhere. Here are six times when it's worth considering dropping insurance coverage.

1. Collision Coverage

Collision coverage protects your car if it's damaged or suffers a total loss in an accident. If you're still paying off or leasing a car, your lender may require such coverage until you own the car outright. [Editor's note: This graf has been corrected to reflect that collision coverage protects your car regardless of whether you are at fault or not]. 

But because vehicle values depreciate every year, the insurer will only pay up to the actual cash value of your car after you've paid the deductible. A vehicle's condition is also factored, so knowing every year your car's actual cash value — or Blue Book value — can help you determine if you should drop collision coverage.

One rule of thumb is to skip collision coverage if the vehicle's cash value drops below $4,000. The cost of insurance for a low value car could cost more than the total vehicle repair and replacement costs in an accident.

Another rule is that if collision insurance costs more than 10% of the value of the car, then it's worthwhile to drop it and put that savings aside for a new car. For example, if collision coverage costs $200 a year on a car valued at $2,000, it's worth keeping the premium for yourself.

However, if you don't have enough money set aside to pay for a major vehicle repair after an accident, then you may want to keep collision coverage.

Collision coverage is needed in such simple accidents as you rear-ending someone at a stoplight, running a stoplight and hitting someone, or backing out of your garage and hitting another car. Without it, liability insurance will be needed to pay to repair the other driver's car. [Editor's note: This graf has been corrected to reflect that collision coverage does not apply to third-party damages.]

You also may want to consider where you're driving before dropping collision insurance. Some areas aren't as safe as they might seem, according to Auto Insurance Center. Some rural areas are more deadly to drive in than urban areas, the site found.

2. Comprehensive Auto Insurance

This type of auto insurance is usually sold together with collision coverage. Your insurance company may require having both. A comprehensive-only policy may be limited to special circumstances, such as for a classic car that's rarely driven.

Comprehensive coverage covers you if the car is stolen, vandalized, or is damaged by fire, weather, natural disasters, or acts of God. It also provides coverage if you hit a house in a one-car accident, a deer or other animal runs into your car, you hit a fence, or experience damage in a riot.

Like collision coverage, it could be worthwhile to drop comprehensive coverage if your car isn't worth much and repairing such damage would be more than the value of the car.

However, comprehensive is usually a small part of an insurance premium, and you may not be able to drop it unless you also drop collision coverage.

3. Rental Reimbursement

Some insurers include rental car reimbursement in their policies. You may need a rental car if your car is damaged in an accident and is at an auto shop for a few days. But if the accident is someone else's fault, their insurance may pay for your rental car. If you're at fault, it's your expense.

Check to see how much you're paying each month, or year, for this type of insurance, and determine if the costs outweigh what you'd pay yourself for renting a car. Is it worth the chance you'll need it?

4. Roadside Assistance

The same logic goes with roadside assistance sold with your car insurance. Chances are you rarely use it and that you have it mainly for the peace of mind when you get on the road.

You may already have duplicate coverage by having AAA, OnStar, or some other service, so dropping this insurance coverage is a no-brainer. Or it may be cheaper to call a friend, relative, or even a tow truck when you're out of gas or need a flat fixed.

5. Term Life Insurance

Having term life insurance is meant for exactly that: a "term" of your life. It's a common type of insurance to buy when starting a family, so that your spouse and children aren't left without income if you die during your working life.

But if your children are in college and no longer live at home, or you're retired, then extending a term policy may not be worthwhile.

6. Insurance Riders

As part of your homeowners insurance, you may have bought riders to cover expensive items that aren't covered under a normal policy. These can include expensive artwork, jewelry, or heirlooms you've inherited.

If you've sold such things or donated them to charity and no longer own them, then it's time to drop these insurance riders.

Having too much insurance is an enviable problem. Whether it's life insurance or over-insuring a home and its possessions, it's a good idea to check with your insurance agent each year to determine if you have too much (or not enough) coverage.

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