Thursday, February 19, 2009

Auto Insurance When Car Prices Fall

People’s hesitation about major purchases like cars has not just slowed down sales of new cars. Used car sales are also down, and because of that, the prices of used cars are down. This year I am seeing prices for used cars, in live auctions and online directories, 20 to 30 percent less than they would have been two years ago. The kind of car that would have gone for $7,000 before might sell for $5,000 now.

The decline in value of used cars may affect you even if you aren’t planning on buying a car, because it limits how much an insurance company will pay to repair your car if it’s damaged in an accident. Ordinarily, an insurance company won’t pay more than its opinion of the “fair market value” of the car, a money amount that is loosely based on what cars of similar make, model, year, and mileage are actually selling for. The idea is that it’s better for you to take the money and buy a similar car.

When insurance companies are paying less, it reduces the value of the insurance, especially the “collision” and “comprehensive” parts of auto insurance, yet insurance companies have not necessarily cut the premiums they charge to match the decline in the amount they are paying out. It is something you might check on the next time you renew or adjust your auto policy. If you are shocked at how little the world thinks your car is worth now, and if the insurance premiums seem too high to reasonably protect that investment, you could drop the collision and comprehensive coverage for that car. But hold on to the money you save, of course — you will need it sooner or later to buy your next car.