Have you recently purchased an old car or are you scouring the market for one? Maybe you’re still driving the same car your parents gifted to you when you earned your driver’s license a couple of decades ago! No matter the age of your vehicle, acquiring basic car insurance is mandatory in Canada. That means paying for third-party liability and accident benefits coverage. However, additional coverage, such as comprehensive insurance, is optional.
Comprehensive insurance covers damage done to your car that results from non-collision-related incidents. These include vandalism, theft, fire, natural disasters, falling objects, riots, and damage done by animals. Since comprehensive insurance is not mandatory, is it worth paying the extra cost for this protection if your car has seen better days? The answer is not entirely clear, as several factors can steer you in one direction or the other. Let’s explore them and how they can impact your decision.
When is a car considered old?
At what point during a car’s lifespan is it fair to describe it as “old”? This is a tricky question to answer accurately, as each vehicle brand depreciates at a different pace. However, on average, you can expect most brands to lose 20% of their value within a year of use. After five years, it’s not uncommon for most vehicles’ value to diminish by 40% – 50%.
While the definition of “old” can vary depending on who you ask, in general, it wouldn't be wrong to use this word to describe a car that's at least ten years old. By this point, it’s accumulated sizable mileage, been subject to extensive repairs, routinely experiences mechanical issues, and may have been through an accident or two. Not surprisingly, it will have a low resale value.
After a decade of driving, you should evaluate how much you’re paying for comprehensive insurance and gauge whether it’s preferable to drop it or retain it. What if you’re looking to purchase an older vehicle. In that case, you need to decide if carrying comprehensive coverage is worth it in the first place.
Are older cars cheaper to insure?
For the most part, older cars are cheaper to insure, given how less valuable they are than newer models. Naturally, a 15-year-old vehicle will be less costly to repair or replace, so insurers won’t hesitate to attach a lower monthly premium to it.
However, this isn’t always the case. Some older cars can be expensive to repair. They may require costly and rare replacement parts, or their particular construction makes fixing them cumbersome and awkward. Older cars also lack up-to-date safety features that work to keep insurance premiums low on their newer counterparts.
All these factors, and more, can prevent a car’s insurance rate from dropping, even as it ages. As a result, you could be stuck paying an exorbitant comprehensive insurance premium while your car’s value erodes. You need to know how to do a cost-benefit analysis of taking out the policy.
How to determine if you should buy comprehensive insurance for your old car
There are two critical factors you need to consider when deciding whether you should buy comprehensive insurance for an old car:
- The car’s fair market value
- Your annual comprehensive insurance cost including the deductible
In general, comprehensive insurance becomes a bad investment once a vehicle reaches 10 to 15 years of age. If your car is less than a decade old, it may still be financially smart to pay for comprehensive coverage.
The first step is to estimate your car’s fair market value, which you can do so by using a site like Kelley Blue Book. This figure represents the most you can expect to receive from your insurance company as compensation for damage done to your car. However, ensure you peek at your insurance policy to determine if payouts are based on the actual market value or the cost of repairs.
The second step is to calculate the amount you pay for your annual comprehensive coverage and deductible. It might be as simple as looking at your current policy.
Once you know these bits of information, deduct your insurance costs from your car’s value to see if you’re getting a good deal. If you get a positive number, comprehensive insurance could still be something to buy. Conversely, if you get a negative number, you should probably avoid it or at least look to reduce your coverage.
For example, let’s assume you own an old vehicle valued at $2,000. Your deductible is $500, and you pay a comprehensive monthly premium of $100. If your car was severely damaged, let’s say by an extreme weather event, you’d have to contribute the $500 deductible, leaving the insurance company to compensate you, at the most, for $1,500. Your annual insurance cost is $1,200, bringing your total cost to $1,700 ($500 + $1,200), which is $200 more than the actual payout you’d get from your insurer. Holding on to your comprehensive coverage in this scenario is not ideal.
Another aspect to consider is how well you’d be able to cope financially should your car get damaged from a flood, vandalism, fire, or similar accident. If you possess a large emergency fund in your savings account, you could justify forgoing comprehensive coverage and, instead, pay for any damages out of your pocket.
Let’s assume you have little to no emergency cash on hand and can’t easily access credit. In this case, it may be worth retaining some degree of comprehensive coverage for peace of mind, especially if your livelihood depends on you having access to a vehicle.
Scenarios where comprehensive insurance is required even for an old car
There are instances where you’re obliged to keep comprehensive insurance, even when you feel it's unnecessary. If you have an outstanding loan on your car, your loan contract may stipulate that you carry it. The same requirement may apply if you lease your vehicle.
There’s no universal rule that states the optimal time to forego comprehensive car insurance. A whole host of factors impact your insurance premium, and vehicles depreciate at different rates. However, once your car hits the ten-year mark, you should assess how much you’re paying annually for comprehensive insurance relative to the value of your vehicle. It’s up to you to weigh the benefits of this optional coverage, both financial and personal.