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Deductibles and Auto Insurance Rates

September 24, 1987|DON G. CAMPBELL | Times Staff Writer

Question: I never get used to what it costs to insure a car in Los Angeles. And so when I received the six-month bill for our two cars--a '74 Volkswagen and an '86 Honda--which came to a total of $983, I examined it carefully to see where we might raise some deductibles to save money. I had always heard that you could save dramatically this way by absorbing the first $200 or $300 of cost yourself in the event of an accident.

I saw that we had a $50 deductible for "comprehensive," and so I decided to change that to $250. I called the company, 20th Century, and made the change, and they said they would send me a new bill. It came today and I'm baffled. The six-month premium for this coverage on the VW dropped only from $25 to $20 and on the Honda from $103 to $77. That's a total six-month savings of only $31 and an annual saving of $62. So what's all this big deal about the tremendous savings you can make by raising your deductibles? I've sent you a copy of the original bill and the amended bill.--J.C.

Answer: "Save dramatically," may be a little strong, according to Tim Dove, regional manager in San Francisco for the Insurance Information Institute. "Substantially" may be a bit closer to it, but even here the savings will vary considerably.

Deductibles, he continued, range all the way from about $50 to as high as $1,000, and what figure you select is judgmental. It boils down, essentially, to how much you can comfortably afford to pay out of your own pocket in the event of loss.

Part of the confusion here may stem from nomenclature: Collision is pretty self-explanatory. It's the physical damage your car incurs when it hits another car (or vice versa), hits a stationary object or is damaged in a roll-over. Because a pea-sized dent in a fender, in today's economy, can translate into a couple of hundred dollars' worth of damage, changing to a relatively high deductible here--and I see that you now carry $300 deductible on both cars--amounts to, yes, a "substantial" savings on your premium.

If, instead of $300, you were carrying a $100 deductible (that's about the lowest deductible any company offers these days), the semiannual premium on the VW would be $65 instead of the $38 you are now paying, and on the Honda it would be $163 instead of the $91 that you are now paying, according to Rick Dinon, 20th Century's vice president for corporate relations.

So, while the increase in the deduction for your comprehensive wasn't exactly a world-stopper, Dinon concedes, the fact that you're carrying a $300 deductible on both cars instead of $100 is racking up savings in the 42%-to-44% range--which is substantial both in terms of percentages and hard dollars.

But, at the same time, the law of diminishing returns creeps into the deductible/premium formula, and the savings taper off sharply when you increase the deductible above $300. Going from a $300 deductible to a $500 deductible, Dinon adds, would drop the six-month premium on the VW only from $38 to $35 and, on the Honda, from $91 to $84.

"As a car gets older," Dinon says, "the aging process simply means that it's going to pick up dings and scratches in the supermarket parking lot--technically falling under the collision category--so it doesn't really pay to try to insure yourself against this. Or for an insurance company to cover. Collision insurance, after a while, stops being cost effective."

In fact, the Insurance Information Institute's Dove says, the rule of thumb on collision coverage in the insurance business is that when a car is between five and seven years old--unless it's a classic of some kind whose actual current market value can be substantiated in some way (such as newspaper advertisements)--it pays to take a long, hard look at whether any amount of collision coverage is worth the cost.

Definition of 'Comprehensive'

Comprehensive isn't nearly as definitive a term, although it's an equally important part of your policy. Just what sort of coverage did you change your deductible on? Dove said comprehensive covers virtually all the damage that your car can sustain except in an actual collision. And that's a wide range of potential woes, not the least of which is theft. It also covers wind, fire and flood damage, falling rocks, damage occurring as a result of theft, glass breakage and assorted things, such as malicious mischief.

Your car's electrical system shorts out and triggers a fire that guts the interior. That's a comprehensive claim. Your car is stolen and is recovered by the police, but the thief has trashed the interior. Again, a comprehensive claim.

While Dove, like Dinon, admits that the dollar reductions you experienced by earlier raising the comprehensive deductible from $50 to $250 is somewhat underwhelming, it's not all that bad when viewed as a percentage. It's a cut of 20% on the VW and a reduction of 25% on the Honda.

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