Something To Hold On To: Comprehensive And Collision Insurance

With used cars holding their value longer these days, it might pay to keep full car insurance coverage longer, too.

The National Automobile Dealers Association (NADA) projects that used-vehicle depreciation rates will remain at historically low levels through 2014. Depreciation averaged 13.1 percent a year from 2009 through 2011 -- far better than the annual 21.4 percent average loss rate from 1996 to 2008, the association says.

Besides putting more money in your pocket when it comes time to trade in your car, the slow depreciation rate could also come into play when you decide whether to keep collision and comprehensive insurance. (See: " Life without comprehensive and collision insurance.")

"For the last two years, we've seen customers hold on to physical damage coverage for a longer period of time -- moving from 10 years to 11 to 12 years," says Cody Cook, spokesperson for Erie Insurance. "While we don't know specifically why this is happening, the economy seems a logical explanation."

American drivers are keeping their vehicles longer, and that might boost demand for collision and comprehensive coverage on older cars, he adds.

Car dealers expect depreciation to remain relatively low. A variety of factors are driving the trend. Improvements in quality, reliability, design and fuel efficiency have increased demand for late-model used vehicles, according to NADA.

Automakers have also shifted to building vehicles to demand, instead of overproducing them. As a result, dealers aren't faced with big inventories to clear out, so they're under less pressure to offer incentives on new cars. Incentives drive down the price of new cars, which drives down the price of used vehicles, NADA says. With fewer incentives, prices stay higher on both new and used vehicles.

Weighing costs and risks of dropping collision and comprehensive insurance

Unlike liability insurance, which most states require you to buy, collision and comprehensive are optional. Collision pays for repairs when your vehicle is damaged from crashing into another car or object, or from flipping over. It also covers damage from potholes. Comprehensive pays for repairs when your vehicle is damaged by some other cause, such as a natural disaster, collision with an animal, or vandalism. Comprehensive also pays out if your vehicle is stolen.

If the cost of repairs is greater than the value of the vehicle, then your car is declared a total loss, and the insurer pays you the market value of the car.

Obviously you should have collision and comprehensive coverage on a newer car to protect your investment. The lender, in fact, likely will require you to have both types of coverage if you took out a loan to purchase the car. (See: " Auto insurance: 8 things you should know about it.")

After the car has lost most of its value, though, it makes sense at some point to drop collision and comprehensive. Certainly there's no reason to keep them if the car isn't worth much more than your deductible. Even if the car were totaled, you wouldn't collect much of anything from the insurance company to repair or replace it. (See: " Collision and comprehensive coverage: should you buy?")

But otherwise, "there's really no set rule for deciding when those coverages become unnecessary," Ohio Insurance Institute spokesperson Mary Bonelli says.

Gauging your car's value

To aid the decision, first find out how much your car is worth. Kelley Blue Book and NADAguides provide online tools to look up values for used vehicles. Your insurance agent can also help. Then compare the car's value to the deductible and the premiums you pay for collision and comprehensive. Weigh the costs of the coverage against taking on the financial risks yourself.

"Can you cover it out of pocket if you're faced with a big car repair bill?" Bonelli says.

You don't have to drop both. You can keep one and drop the other. When deciding, keep in mind you're more likely to file a collision claim than a comprehensive claim. For every 100 insured cars in 2010, 5.7 collision claims were filed versus 2.6 comprehensive claims, according to the Insurance Information Institute. Nationwide, the average driver will experience a car collision every 10 years, according to an auto claims analysis by Allstate Insurance Co.

Finally, get some good advice.

"Because these considerations are different for every consumer and may be complex, we recommend they reach out to a trusted, local insurance adviser," Cook says.