One question that comes up a lot is: “As my vehicle gets older, why doesn’t my auto insurance premium drop since the vehicle is worth less?” This is a great question! At first thought this seems like the logical process. The vehicle is worth less, the insurance company will have to pay out less if it is totaled, so my rates should go down. And that is a valid argument and something that does play a factor. However, there are several more things in play here.
So, let’s cover these topics. I’ll package the first two together as the reason for both is similar.
We’ll start with a smaller aspect of the rate equation. As a vehicle gets older, the amount that your insurance would pay out if someone gets hurt will not decrease. In fact, medical care tends to increase every year and sometimes substantially. Then factor in that most cars as they get older, tend to not be as safe unless very well maintained. Stopping distance increases, brakes can fail, turning ability can be reduced, etc on a vehicle as it ages. These all increase your chances of having a claim, which would cause rates to go up, not down. So the small reduction from year to year in the value of your vehicle is typically offset some by the higher chances of a claim happening. But like I said, that is just a small part. The bigger part is the liability and medical payment payouts themselves. The average payout for medical care goes up every year! So, when you hit someone and they go to the ER to make sure they are OK, that bill gets higher every year. So, if your vehicle drops in value, but the amount your insurance company would have to pay out for any injury increases. The insurance company is still at risk for a lot more money being paid out.
Then there is the “small claim” part of the equation. Most insurance claims are small claims. This is when a bumper, a door, or a side panel are damaged in a minor accident. If you back into your mailbox and damage your rear bumper, that claim amount goes up every year too. Your vehicle may be worth a lot less than it did when it was brand new, but the insurance company is having to pay more every year to pay those small claims. So even though a total loss payout would be much less than when your car was brand new, all those small claims (that are a lot more likely to happen) cost your insurance company more every year. This causes your rate to stay the same or slightly go up. One last factor is safety features. New technology is developed all the time to keep you safe. Not all cars will have every feature, but obviously your older car won’t be getting any upgrades unless you foot the bill as manufacturers don’t have a practice of calling you to bring in your vehicle for upgrades. And those safety features keep claims costs down, so keep your rates down too. This can actually cause some new cars to be less to insure than older cars.
So, in summary, there are a lot of factors that go into your insurance rates, not just the value of your car. All the small and more common claims play just as big of a factor as the big claims that happen less often. And the biggest factor is the liability to others. Even though typically an older car will be a little less than a newer car, I have wrote many people at a lower rate when they get a new car due to all these other factors.
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