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You may risk 'economic hardship' by cutting auto insurance costs

In response to the rocky economy, American consumers have been placing themselves at risk of "economic hardship" by reducing their auto insurance coverage and boosting their deductibles to save perhaps a few hundred dollars a year, according to a new study.

The number of older vehicles without optional comprehensive or collision insurance coverage rose from 53 percent in 2006 to 63 percent in 2010, according to the study, conducted by auto insurance analytics company Quality Planning. That drop in coverage resulted in yearly out-of-pocket savings of $229, the study found.

Comprehensive and collision are optional types of auto insurance. Nearly every state requires a driver to carry a minimum amount of auto liability insurance, which pays for damage you do to another insurance collision comprehensive

Comprehensive coverage includes almost everything that might go wrong with your car, except collision. Examples are fire, theft, vandalism and hail damage. As its name suggests, collision coverage applies to damage to a policyholder's car from a collision.

Robert Hunter, director of insurance at the Consumer Federation of America, says collision should be the first type of coverage you consider ditching when looking at collision and comprehensive coverage. That's especially true for good drivers, he says. "If a good driver is hit by another person, the liability coverage of the other person kicks in, with no deductible," Hunter says.

Comprehensive coverage should take priority over collision coverage, Hunter says. That's because comprehensive coverage is cheaper than collision coverage and pays for damage that's mostly out of your control, such as vandalism or theft. Hunter recommends eliminating comprehensive coverage once the cost of your auto insurance reaches 10 percent of your car's value.

According to the Quality Planning study, American consumers spent an average of $721 a year to insure a vehicle between 2006 and 2010. The average cost to insure a new vehicle (from the current model year) was $913 a year. By comparison, the average annual cost to insure an older vehicle (at least 10 years old) was $528.

For new vehicles, Quality Planning says, most policyholders bought complete coverage -- liability, comprehensive and collision -- from 2006 to 2010. Quality Planning attributes that, in part, to banks requiring certain coverage for drivers who have car loans and to owners of new cars seeking to protect their purchases.

On the flip side, Quality Planning found that owners of older vehicles were more willing to skip comprehensive and collision coverage to save money. Owners of older vehicles also were more likely to shoulder more personal risk by choosing higher deductibles.

"Your coverage should fit your circumstances. If you cannot afford a high deductible should an accident occur, you should lower it. If you can afford it easily, you should raise it," Hunter says.

Hunter recommends opening a bank account just for deductible payments for auto insurance (as well as for home insurance). As money accumulates in the account, raise your deductible, he says. Hunter says he opened a "deductible account" decades ago.

"Over 30 years, I have paid out two claims for a total of about $1,300. I now have about $4,350 in the account -- more than my current deductibles," Hunter says. "I will try to shop for higher deductibles soon."

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