New vs Used Cars

Is buying a used car really all that important to your financial health?  I’ve seen lots of articles and posts that say that financially responsible people buy only used cars.  Being the data geek that I am, I was curious so looked into the question.  In this post, I’ll provide you with my insights on the importance of buying a new vs used cars.

Summary of Findings

Here are the important things I learned from studying this question.

  • The cost of your car is more important than whether it is new or used. For example, you will have more savings if you buy a new car for $15,000 than a used car for $20,000, assuming you own them for the same length of time.
  • How long you own your car can be more important than whether you buy a particular model when it is new or when it is three years old.
  • The accumulation of savings from buying less expensive cars and owning them longer, especially after the compounding benefit of investment returns, can be significant though not as large as the amounts I’ve seen reported by some other authors on this topic.

The chart at the very end of this post illustrates these points (so keep reading).

Cost of Buying A Car

How much you pay for a car depends on several factors – its make and model, how old it is, how many miles it has on it, whether it has been in an accident, among other things.  It also depends on how you pay for it – cash, lease or borrowing – as discussed in my post on that topic.  If one of your goals is to save as much as possible, you’ll want to buy the least expensive car that meets your needs, regardless of whether it is new or used.

The biggest argument against buying new vs used cars is that the value of the car decreases more per year when it is brand new than when it is older. This decrease in value is called depreciation.

Depreciation

The chart below illustrates estimates of the patterns of depreciation for five different makes and models – a Subaru Impreza, a Ford Fusion, a Toyota RAV4, a Ford F150 and a BMW M4.

These estimates are based on a combination of data from Edmunds and the National Automotive Dealers Association (NADA). These two data sources didn’t have always values that were consistent, so I applied some judgment in deriving these curves.

The graph shows that all five models depreciate between 18% (Impreza) and 29% (F150) in the first year.  In the next 10 years, depreciation is generally between 13% and 17% per year and is even lower when the cars are older than that.

Depreciation in Dollars

To look at these values from a different perspective, I created the next graph that shows the dollar amount of estimated depreciation each year.

This chart shows that, even though the Fusion has the second highest percentage depreciation in the first year, it has the smallest dollar depreciation.  When considering how much a car will cost you, it is the dollar depreciation that is important.

These graphs make it fairly clear that, if you plan to reduce the cost of a car purchase by buying used, you save the most money by buying a car when it is one year old. The amount you will save gets smaller with each additional year the car ages.

Costs of Owning a Car

In addition to depreciation and, if applicable, finance or lease costs, there are five other major costs of owning a car – fuel, insurance, taxes and fees, maintenance, and repairs.

Fuel

The cost of fuel (e.g, regular, premium or ethanol-free gas, diesel or electricity) will generally stay constant for each mile you drive, other than inflationary changes in fuel prices.  For modeling the total cost of ownership, I assumed you will drive the same number of miles every year so the real cost of fuel will be constant.  I used the first-year fuel cost from Edmunds True Cost to Own as the real cost of fuel in every year.

Insurance

The portion of insurance that covers liability will likely be constant for a particular car in real dollars.  The cost of liability insurance will be higher for makes and models of cars that are in more accidents (e.g., sporty ones) and larger cars (e.g., pick-ups that will cause more damage to another vehicle or more severe injuries).  For my analysis below, I have used the first-year insurance cost from Edmunds True Cost to Own.  I assumed that 40% of that amount was for liability insurance and would stay constant in real dollars.  That leaves the remaining 60% for physical damage coverage which I assumed would decrease, in real dollars, in proportion to the value of the car.

Taxes and Fees

Taxes and fees can be constant over time or decrease with the value of the car, depending on the state in which it is registered.  For my analysis below, I used the first-year amount for taxes and fees from the Edmunds True Cost to Own.  For subsequent years, I have assumed that taxes and fees, in real dollars, would decrease with the value of the car.

Maintenance

This component of the cost of owning a car includes regularly scheduled maintenance and parts replacement, such as oil and other fluid changes, tire rotation, balancing, alignments and replacement, brakes, transmissions, tune-ups and anything else included in the maintenance schedule provided by the dealer when new. It excludes repairs for damage to the car and repair or replacement of parts not on the schedule.

I have assumed that the real cost for maintenance is fairly constant per mile over the life of the car.  Because I am assuming that your annual mileage is fairly stable, I can assume that the real cost of maintenance is constant from year to year.

Warranties Reduce Maintenance Costs

The significant exception is that many manufacturers include the cost of up to five years of maintenance in the purchase price of a new car.  In my analysis below, I have relied on the information in the Edmunds True Cost to Own for the length of time that maintenance is covered by the manufacturer.  After that, I used the average maintenance cost for the remaining years included in the Edmunds data and assumed it was constant in real dollars for the rest of the life of the car.  I also assumed that the maintenance provided by the manufacturer is transferrable to a new owner.

If you are comparing the cost of a new car with that of a used car, you will want to make sure you understand which maintenance costs are covered by the warranty for each vehicle.  For most of the cars in this comparison, the average annual cost of scheduled maintenance was estimated by Edmunds to be between $750 and $1,150 a year.  The exception is the BMW for which the average annual cost after the warranty ends was closer to $3,000 a year.  The maintenance covered by the dealer could offset some of the higher depreciation you experience in the first few years of owning a new car.

Repairs

Repair costs include repair of damage to your car, such as cracked windshields, and repairs or replacement of parts that break.  For my analysis below, I used the repair costs provided by Edmunds for each of the first five years after the car is new.  I then looked at the results of a Consumers Report study to estimate how much repair costs would increase as the car got older.  Based on that study, I estimated that repair costs increased about 4% per year in real dollars.

Total

The graphs below show the components of the cost of ownership (excluding purchase price, financing cost and depreciation) for the five illustrative cars in each of the first and fifth years of ownership.

 

A comparison of these charts shows the much lower cost of owning a new car than a five-year old car if the costs related to its purchase are excluded.  While the insurance goes down from the first year to the fifth year, the cost of maintenance increases significantly as the manufacturer is no longer paying for it.  In addition, Edmunds shows no repair costs in the first year after it is first sold, but they can be significant, especially for the BMW M4, by the fifth year.

The chart below shows the total of these costs for each car by the number of years since it was new.

For most of these cars, the ownership cost is fairly constant starting in the second year. The Impreza, Rav 4 and Fusion all have annual ownership costs of about $3,500.  The F150 has a similar pattern, but its annual ownership cost is closer to $4,500.  The BMW M4 ownership cost is similar to that of the F150 for the first three years, but increases dramatically when BMW stops covering the costs of maintenance and repairs.

Total Cost of Ownership

To provide insights on the long-term costs of different car-buying decisions, I calculated the total cost (in real dollars, i.e., without adjustment for inflation) of owning a car assuming the same choice was made for 60 years.  I used 60 years as I thought it fairly closely represented the length of time people own cars – from the time they are about 20 until they are about 80.

In these comparisons, I included the initial purchase price of each car (using the new car costs from Edmunds and used car costs using my approximation of depreciation) and the other costs of ownership as discussed in the previous section. Also, whenever a replacement car was purchased, I assumed that the preceding car could be sold at the depreciated price.

New vs. Used

The two graphs below show the total cost over 60 years of owning each of the five cars. The three bars for each car correspond to buying a new car, a one-year old car and a three-year old car.  The first graph compares the total cost if you buy a replacement car every five years; the second, every 15 years.

If you replace your car every five years, it is clearly less expensive to buy a three-year-old car than a one-year-old car or a new one, though it becomes less important if you are buying inexpensive cars such as the Fusion.  The difference between buying a new car and a one-year-old car is quite large for the F150 and the BMW, both of which have high depreciation in the first year.

If you own each car for 15 years, the benefits of buying a used car are much smaller. In fact, the increased maintenance and repair costs of buying a one-year-old car essentially offset the high first-year depreciation for the Subaru, Toyota and Fusion.  Buying a three-year-old car is still clearly less expensive for all models.

More Expensive vs. Less Expensive

The Subaru and Fusion are fairly similar cars – both are basic 4-door sedans, though the Subaru has all-wheel drive.  If you don’t need all-wheel drive, you might be indifferent between the two cars.  By comparing the total costs of the Subaru and Fusion in the above charts, you can see that the long-term cost of ownership of the Fusion is less than that of the Subaru.  In particular, the cost of buying new Fusions is less expensive than buying three-year-old Subarus.

This comparison emphasizes the point I made in the Summary that the initial purchase price of your vehicle is a more important factor than whether you buy new vs used cars.

Length of Time Owned

The graph below compares the total cost of ownership if you buy new cars and own them for different lengths of time.

The longer you own your cars, the fewer times you need to replace them. Replacing cars fewer times is less expensive over the long run, even though you get less for them when you sell them.  One consideration when you own your cars for a long time is that you’ll need to save up more for the replacement car because you will get less when you sell the old car.

For the Subaru, Toyota and Fusion, there is a small difference in total cost between replacing your car every three years and replacing it every five years.  For the BMW and F150, which have higher depreciation, the benefit of keeping your car for five years is larger.

For all five cars, you will save a significant amount over your lifetime if you replace your cars every 15 years as compared to replacing them every three or five years.

The graph below emphasizes the importance of how long you own your car.  The blue bars represent the total cost of ownership if you buy new cars and own them for 15 years.  The orange bars correspond to buying a three-year old car and replacing it every five years.

For all fives makes and models, replacing a new car every 15 years is about the same total cost or slightly less expensive than replacing three-year old cars every five years.

Compounded Value of Savings

Many of my readers look at how much more money they will have when they retire if they make certain financial decisions.  I think this perspective is terrific, as it focuses on long-term financial objectives.  It also encourages financial responsibility in that these analyses assume that you will save the money in a tax-advantaged retirement account, such as an IRA or 401(k), rather than spend your savings on something else.  My post at this link provides more information about tax-advantaged retirement accounts.

Common Assumptions

I’ve read a few other posts that look at how much money will accumulate if you buy used cars instead of new cars and invest the difference in stocks.  These posts tend to make the following assumptions:

  • You have enough money to pay cash for a new car every certain number of years (such as 10), but buy a used one instead. One example I saw assumed that a three-year old car would cost 50% of a new car.
  • You replace your car when it is a certain number of years old, such as 10, regardless of whether you buy it new or used (three years old, for example).
  • You are able to invest the difference between (a) the stream of cash needed to buy the new car every 10 years and (b) the stream of cash needed to buy the used car every seven years in the stock market at 8% to 10%.

Better Assumptions

There are a few aspects of this process that most posts I’ve seen overlooked.

  • They exclude the cash you get when you sell your car.
  • They overstate the cost savings from buying a three-year old car. My analysis indicates that cars depreciate between 35% and 45% in that time frame, not 50%.
  • They ignore the other costs of ownership, especially the much lower repair costs and the maintenance costs covered by manufacturers’ warranties in the first few years of ownership.
  • They ignore the riskiness of investing in the stock market. That is, if you invest the savings from buying a used car in the first year, there is as much as a 15% to 20% chance that you will not have enough money in the seventh year to replace your used car.

In the discussions below, I will use essentially the same paradigm, but will refine some of the assumptions.  In particular, I will revise the investment assumptions so they:

  • better reflect the cash flow needs,
  • use the higher purchase costs for the used car,
  • include all costs of ownership, and
  • eliminate the risk that you might not have enough money to buy your second car.

This analysis is simpler than it could be.  In the entire analysis, I stated all of the cash flows in current or real dollars. That is, your actual savings will likely be higher than is estimated in this analysis because, with inflation, the cost of the more expensive strategy will be even more expensive than if we had assumed that all costs were subject to the same inflation rate.

Reasonable Investment Assumptions

To avoid the risk that you won’t have enough money to pay for the second used car, I will assume that you can earn 3% in an essentially risk-free investment for the first 10 years (until you replace your new car for the first time). In the current interest rate environment, you can earn close to 3% on CDs, corporate bonds or high-yield savings accounts.  After that, you have enough savings built up from buying two used cars instead of two new cars that you can afford to take on the risk of investing in the stock market.

I have used the annual returns on the S&P 500 from 1950 through 2018 to model the amounts you will have accumulated by selecting the less expensive strategies.

New vs Used Cars

For the first comparison, I will look at the example discussed above – buy a new car every 10 years or a used car every 7 years.  In this comparison, I calculated how much you would have at the end of 40 years if you invested the difference between the new car costs and the used car costs.  For the first 10 years, I assumed you would earn 3%.  For the remaining 30 years, I used the time series of 30 years of S&P 500 returns starting in each of 1950 through 1968 (for a total of 39 time series).  To reiterate, this comparison assumes that you invest the difference in a tax-advantaged account and don’t spend it on something else.

If you buy used F150s instead of new ones, the historical stock market returns indicate that you will have an average of $390,000 more in retirement savings at the end of 40 years with a range of $200,000 to $800,000.   For the Subaru, the average is $160,000 in a range of $75,000 to $350,000.

This analysis indicates that, if you prefer to drive fairly expensive cars that depreciate quickly when they are new, you can accumulate a substantial amount of money if you buy used cars for 40 years.  For less expensive cars that don’t depreciate as quickly, the additional savings amount isn’t as large but is still significant.

More Expensive vs. Less Expensive

You can get almost as much additional retirement savings if you buy a less expensive new car and own it for 10 years as you can if you buy the used F150 instead of a new one and more than if you buy a used Subaru instead of a new one. For example, if you buy the Fusion (currently about $15,300 new) instead of the Subaru Impreza (currently about $26,000 new according to Edmunds) every 10 years, you would have an average of about $300,000 more in retirement savings.  That additional money comes from:

  • the $11,000 of up front savings from the first car purchase,
  • the $8,000 of savings for purchase of the three replacement cars after trade-in,
  • the $250 to $350 a year less it costs to own the Fusion, and
  • the investment returns on those savings.

This analysis shows that you can save more by buying a less expensive new sedan (the Fusion) every 10 years than by buying a three-year old Subaru every seven years. That is, if instead of buying new Subarus you buy new Fusions, you will have an average of $300,000 in additional retirement savings, but only $160,000 if you buy used Subarus.

Length of Time Owned

You can also accumulate savings by buying cars less often.  For this comparison, I looked at comparison of buying new Subarus and F150s every five years and every 15 years.  If you replace the Subaru every 15 years, you will accumulate an average of $300,000 of additional retirement savings in 40 years as compared to replacing it every five years.  With the faster depreciation and higher cost of the F150, the average additional savings in 40 years is about $600,000.

Comparison of Options

The box and whisker plot below (discussed in more detail in my post on risk) compares the amount of additional retirement savings you will have under the options above.  Briefly, the boxes represent the range between the 25th and 75th percentiles, while the whiskers (lines sticking out of the boxes) represent the range between the 5th and 95th percentiles.  Recall that the only source of variation in these results is the different time periods used for stock returns – the 39 30-year periods starting in each of 1950 through 1988.

The first three boxes relate to the purchase of fairly modest sedans – the Subaru and Fusion.  The graph shows how much more retirement savings you will have if you either buy new Fusions instead of new Subarus (second box) or replace your new Subaru every 15 years instead of every 5 years (third box) than if you buy three-year-old Subarus instead of new ones (first box).

The last two boxes relate to the purchase of the more expensive F150.  Again, you will accumulate much more in your retirement savings if you replace your F150 every 15 years instead of every 5 years (last box) than if you buy three-year-old trucks instead of new ones (second to last box).

Final Words

Ultimately, you’ll need to buy a car that best fits in your budget and meets your needs. As you make your choice, though, you might want to remember that there are clearly ways you can save money even if you prefer to buy new cars.

Car Insurance Coverage

If you own a car, you buy car insurance coverage.  In the process, you have to make lots of decisions.  Do you want to buy Comprehensive? Collision? What limit for Bodily Injury?  For Medical Payments? For Uninsured Motorist? What deductible? As with other insurance products, auto insurance is full of its own unique terminology.  In this post, I’ll explain all these terms and provide some insights on how to make some of the decisions that determine your car insurance coverage.

As I told my kids (see Advice I Gave My Kids post), I recommend that you read every contract before you sign it.  Auto insurance policies don’t change all that much from year to year. If you use the same insurer and live in the same state, you can probably read the policy every few years to refresh your memory.  In the meantime, this post will help you understanding the basics.

Before going into the coverages, though, I need to provide some background about liability and different types of laws governing the liability for car accidents.

No-Fault vs. Tort Jurisdictions

When you cause an accident in which someone else is hurt or their property is damaged, you have created a liability for yourself to reimburse them for their economic loss.  That is, you are liable for paying their medical costs and lost wages, among other things, and repairing or replacing their property. In some 12 states (see the chart at the end of this article for a list) and most or all of Canada, though, the laws make the driver of each car involved responsible for their own and their passengers’ costs in certain accidents.

In the 1970s, car insurance costs escalated very rapidly.  No-fault coverage was introduced in some jurisdictions to slow auto insurance inflation.  In theory, under a no-fault system, every driver is responsible for the costs of themselves and their passengers regardless of who was at fault for the accident.  In practice, no-fault is applied to only “small” accidents. The definition of “small” varies widely across jurisdictions, with some defining it based on the total cost of injuries and damage and others based on the nature of the injury.  Jurisdictions that don’t have a no-fault system are often called tort jurisdictions.

Tort Liability

In a tort jurisdiction, you are required to buy Bodily Injury liability coverage.  In these jurisdictions, this coverage protects you against the cost of all injuries to others.  You will also be offered Medical Payments coverage which reimburses you for your and your passengers’ medical costs in accidents you cause.

No-Fault

Under a no-fault system, you are also required to buy Bodily Injury liability coverage to protect yourself against the cost of injuries to others, but only for accidents that aren’t “small.”  In addition, you will be offered Personal Injury Protection which covers injuries to you and your passengers in accidents you cause and in all “small” accidents caused by others.

Coverage Overview

The table below shows which of your coverages will protect you against costs from the people injured and property damaged or destroyed in an accident you cause.  I’ll describe these insurance coverages in a bit more detail below.

Affected Party in an Accident You Cause Injuries – Tort Injuries – No Fault Damaged Property (cars, etc.)
You and your family Medical Payments Personal Injury Protection (PIP) Collision
Other passengers Medical Payments Medical Payments Collision
People and things in other cars Bodily Injury (BI) Their PIP if small, your BI otherwise Property Damage Liability
Pedestrians Bodily Injury Medical Payments Property Damage Liability

 

Your insurance coverage is available to you regardless of whether you are driving your car or someone else’s car, including rental cars.  If you purchase Collision coverage, it will be cover the full amount of damage for any other vehicle you drive even if the other vehicle is worth more than any of your cars.

Your coverage is also available to anyone else who is driving your car with your permission.  That is, unless someone steals your car, all of the coverages that you buy are available to another driver.  Loss or damage to your car due to theft is covered under Comprehensive.

Bodily Injury Liability (BI)

Bodily Injury liability coverage pays costs related to injury or death for which you become legally responsible because of a car accident.  Interestingly, passengers are not insured under Bodily Injury liability coverage but rather are covered under your Personal Injury Protection, Medical Payments or Uninsured Motorist coverage.  In no-fault states, the insurer pays only when the accident is severe enough to not be considered small.

Property Damage Liability

Property damage liability coverage pays the cost of damage to other people’s cars and property for which you become legally liable.  Most of the time, the damage is to other people’s cars and their contents. I know one person, though, who fell asleep while driving in a rural area.  She crossed the median, the lanes in the other direction and ran into the front of a store. Fortunately, no one was injured, but the store and its contents were damaged.  In this accident, her car insurer repaired the store and replaced its contents under her Property Damage liability coverage.

Liability Limits

You will have the option to select the limit of liability for your Bodily Injury and Property Damage liability coverages.  Coverage can be offered with split limits or a combined single limit (CSL).

Split Limits

When there are split limits, you will see three numbers, e.g., $100K/$300K/$50K.  The first number ($100,000 in the example) refers to the amount the insurer will pay for each injured person. The second number ($300,000 in this example) is the total amount the insurer will pay for Bodily Injury coverage for each accident.  The third number ($50,000) is the total amount it will pay per accident for Property Damage liability. When there is a combined single limit, the limit will be described using a single number. That number is the maximum amount the insurer will pay for each accident for all injuries and Property Damage liability combined.

Combined Single Limit

I usually buy a combined single limit, but recommend looking at different options to compare the pricing.  For example, if you can find $100K/$300K/$50K coverage for significantly less than a $300,000 combined single limit, you might want to buy the split limits.  I buy the combined single limit because there is more coverage if a single person is severely injured. For example, if only one person is injured in an accident I cause but that person has $250,000 of medical costs and lost wages, a $100K/$300K/$50K limit would cover only $100,000 of the $250,000.  A $300,000 combined single limit policy would cover all of it. Another reason I buy a combined single limit is that I buy an umbrella policy (which I’ll cover in a future post). My umbrella policy requires a combined single limit on my underlying auto policy.

What Limit

I always buy as much limit as I can afford (and, as I indicated above, started buying umbrella coverage when I could afford it).  If you injure someone severely in an accident, you are liable for the full amount of their medical costs and lost wages regardless of whether they are covered by insurance.  If someone has $250,000 of medical expenses and lost wages and the applicable limit on your policy is $100,000, they can demand that you pay the remaining $150,000 from your personal assets.

Personal Injury Protection (PIP)

Personal Injury Protection coverage (PIP) pays benefits to you and members of your immediate family when involved in an auto accident, regardless of who is at fault, in a no-fault jurisdiction.  You can be reimbursed for medical expenses, loss of income and funeral expenses.

When I lived in a no-fault state, I bought a much lower limit for Personal Injury Protection than for Bodily Injury liability.  Most importantly, my family and I have always had health insurance and I had disability coverage. If you are severely injured in a car accident, your auto insurer pays first.  My health and disability insurance also provided coverage after my auto insurance coverage was exhausted. I suggest confirming with your human resources contact or health and disability insurers that you would be covered if injured in a car accident before making the same choice I did.  If not, you might want to consider buying as high a limit as you can afford.

Medical Payments

Medical Payments coverage reimburses medical expenses in an accident.  In all states, coverage is provided for passengers who are not family members and pedestrians.  In tort states, you and your family members are also covered.

I probably don’t buy a high enough Medical Payments limit.  Until I wrote this post, I always focused primarily on my situation and selected my limit in the same way I did my Personal Injury Protection limit.  Now that I’ve thought about it more, I realize that I should also be considering my passengers and any pedestrians I might injure. They might not have as much health and disability insurance as I do, so I wouldn’t have a back-up if my Medical Payments limit was less than the cost of their medical care and lost wages.  If you have a lot of non-family-member passengers and especially if you drive other people’s children to school or activities, you might want to consider buying as much Medical Payments limit as you can afford.

Uninsured and Underinsured Motorist (UM/UIM) Coverage

If you, your family members or your passengers are injured in an accident caused by someone else, that person is liable for your medical costs and lost wages.  Unfortunately, there are many accidents in which the other driver’s Bodily Injury limit is less than your medical costs and lost wages or sometimes the other driver has no insurance at all (which is illegal in all US states and Canadian provinces, but still happens).  In those situations, your insurer will reimburse you for any costs you can’t recover from the other driver or its insurance under your Uninsured and Underinsured Motorist (UM/UIM) coverage. The maximum amount you can receive from your insurer is your UM/UIM limit.  Your insurer then has the right to try to recover any amounts it pays to you from the other driver directly.

The selection of a UM/UIM limit is very similar to that of a Medical Payments limit in that you are buying protection for not only you and your family members, but also your passengers.

Physical Damage Coverages

Damage to your car from accidents you cause can be insured under Collision and Comprehensive coverages.

Collision and Comprehensive

Collision reimburses you for damage to your car when it impacts another vehicle or object or rolls over.  Comprehensive reimburses you for damage to or loss of your car from perils than a collision. Perils explicitly covered by Comprehensive are:

  • Missiles or falling objects
  • Fire
  • Theft
  • Explosion or earthquake
  • Windstorm
  • Hail, water or flood
  • Malicious mischief or vandalism
  • Riot or civil commotion
  • Contact with bird or animal
  • Breakage of glass (also covered under Collision if from an accident)

In addition, many policies will also reimburse you for a temporary replacement for your vehicle until it is repaired.  My policy provides only $20 a day up to a maximum of $600, so the coverage would help cover the cost of renting a car but is not likely to be enough.

A quick tip – Property Damage liability coverage is easily confused with physical damage coverage.  Property damage liability covers other people’s cars.  Physical damage coverage includes Collision and Comprehensive so protects your car.  I don’t recall all the details, but have an example to illustrate the difference.  One of my daughter’s friends was driving back to college late at night after Thanksgiving on an interstate.  She hit a deer and totaled her car. She had not purchased Comprehensive, so was afraid she was going to have to figure out how to replace her car on a very limited budget.  It turns out the deer had a hunter’s tag on it and had fallen off the roof of the hunter’s car. Because the hunter was responsible for the deer being in the road, she was fully reimbursed for the value of her car under his Property Damage liability coverage.

Physical Damage – What to Buy

Collision and Comprehensive coverages can be quite expensive.  On one of my recent policies, my Comprehensive coverage cost more than my liability coverages, while my Collision coverage cost is 2/3 of the cost of my liability coverages.  I note that I have selected a high deductible and drive moderately old cars. These coverages would be even more expensive if I drove newer cars or selected a lower deductible.  As such, it is very important to balance the benefits of these coverages with their cost.

Physical Damage – Rules of Thumb

I have a few rules of thumb I use in making my decision about whether to buy Comprehensive and Collision coverage and at what deductibles.  They are:

  • Never buy insurance on something you can afford to lose or replace.  For example, you might have an old beater car you drive only in the winter.  If you can afford to replace the car or have another car you can drive in the winter, you might not buy Collision or Comprehensive on that car at all.
  • Select the highest deductible you can afford.  If you can’t afford to replace your car, especially if it is new or your only vehicle, you’ll want to buy Comprehensive and Collision if it fits in your budget.  You can reduce the cost of these coverages by selecting a higher deductible. You can review your budget and your savings to see how much you can afford to repair or replace a vehicle if it is damaged or stolen.  This review can inform your selection of a deductible.
  • Always put Comprehensive and Collision on at least one car if you rent cars for personal use with any frequency.  As mentioned below, your car insurance will cover you when you rent a car up to the maximum coverage you have on any one vehicle.  If you rent cars for only a few days a year, the cost of the rental car company’s insurance will be less than the cost to cover one of your cars for physical damage.  My experience, though, is that rental-car companies’ insurance is very expensive and I can afford to put Comprehensive and Collision coverage on one of my cars for my annual cost of buying coverage on rental cars.

Towing and Labor

Some insurers offer to insure you against the costs of towing and labor if your car breaks down.  Examples of the labor costs that are insured under this coverage include unlocking your car, changing a tire, gas, oil or water delivery, and jump-starting your car.  To be clear, your car insurer will not pay for any repairs to your car once it has been towed. It just covers costs to get you off the side of the road.

This coverage is very similar to what is available from such entities as the American Automobile Association (AAA) or the Canadian Automobile Association (CAA).  If you are interested in this coverage, you’ll want to compare the coverage and cost from your insurer with that from other entities. For example, depending on what level of service you buy, AAA will tow your car for either five or 100 miles.  By comparison, towing coverage under a personal auto policy is capped at the dollar amount of the limit you purchase. As you make the cost comparison, you’ll want to consider whether you use any “free” services from the other entities.  Also, if you buy this coverage, remember to use it if you find yourself stranded. I was so rattled by being forced off the road and onto the median by a truck in a couple feet of snow that I forgot I had this coverage. I ended up paying the tow bill myself.  Oops!

Exclusions

There are lots of exclusions in an auto policy.  Some important exclusions I have seen include:

  • You are not covered for intentional acts.  For example, if you are mad at another driver and intentionally run your car into the other driver’s car, your insurance company won’t pay for any damage or injuries.
  • You are generally not covered if you are using your car in a business related to cars.  Driving your car for Uber or Lyft or similar is almost always excluded. Also, if you park, sell or repair cars, any damage to or caused by those vehicles will not be covered.
  • You are usually not covered if you are driving a vehicle other than a car, pickup or van for any type of work.
  • You are not covered for injury to anyone who is your employee, unless it is a domestic employee.  We always added our nannies on our insurance policies as drivers to make sure there was no question that they were covered.

Tips about Renting Cars

Your auto policy will cover you and a rental car in the same way as it covers the vehicle on your policy that has the greatest coverage.  For example, let’s say you own two cars – a new one with $500-deductible Comprehensive and Collision coverage and an old one with no physical damage coverage.  Your insurer will provide $500-deductible Comprehensive and Collision on any cars you rent.

The one exception is that many insurers won’t cover the charges from the rental company for the loss of use of its vehicle.   That is, the rental company charges the renter for the costs it incurs and the profits it loses because the car is being repaired and not available for rent.  These charges are known as loss-of-use charges. These charges can be very expensive, even more than the costs to repair the car. In all our years of renting cars, we have only had one claim.  One of our nannies left her purse in plain sight in a locked rental car when she took the kids to the beach. Someone broke the back passenger window to grab her purse. In that case, our insurer paid for the damage to the car under our Comprehensive coverage after we paid the deductible.  It also argued with the rental car company about the loss-of-use charges. In the end, we did not have to pay anything other than our deductible.

When renting cars, I decline all of the insurance coverage offered, taking my risk that I might have to pay for loss of use.  But, I also make sure I always have Comprehensive and Collision on at least one car so that coverage and, even more importantly, the insurer’s leverage in negotiating with the car rental company are available when I rent cars.