Everybody who owns a car, owns one for a reason. Some people need their cars to get from point A to point B. Some people buy cars to impress their neighbors. Some people just buy an absurd amount of cars, because they like them. No matter who you are or why you buy a car, there comes this added cost of insuring the vehicle.

To insure a vehicle, we all have two choices. Full coverage or liability only insurance. That is, unless you have a car loan (yikes). Since the bank owns the car, you have to get full coverage. There are no choices when you don't own the vehicle. This just adds to the many reasons to get out of that car loan. You get to stop paying the bank interest and you get to make your own decisions about car insurance. That's a win-win in my book.

Now, the government also requires minimum car insurance for all vehicles. So, all of us debt free car owners are still required to get some car insurance. This insurance is of course called liability only insurance, and I actually think this insurance is good for society. Every one is required to have it and this insurance will definitely help if you get into an accident and it was your fault.

So, what type of insurance makes sense?

Both types make sense in their own regard and I have a great personal example to use as a way to explain my decision making process when it comes to insuring vehicles. As I mentioned in earlier articles, both my wife and I own our cars debt free! I drive a 2005 Pontiac Grand Prix and my wife drives a 2011 Toyota Venza. We have decided to insure each vehicle differently. My wife's car has full coverage and my car has liability only insurance. That's right, we are the owners of two vehicles, but have two different types of car insurance.

What made us make this decision?

Well, there are a couple of data points that we used to help make this decision. First, we looked at the cost of full coverage and liability only insurance quotes. Second, we looked at the values of both cars on Kelley Blue Book. Lastly, we calculated the amount of years it would take to save the savings to replace the car.

Let's start with the cost to insure both cars:

2011 Toyota Venza: $993 a year for Full Coverage
2005 Pontiac Grand Prix: $1,100 a year for full coverage (yikes)
2005 Pontiac Grand Prix: $533 for Liability only coverage

Value of the Car on Kelley Blue Book

2005 Pontiac Grand Prix: $800-$1,100 Trade-In or $2,363 Private Sale (Fair Condition)
2011 Toyota Venza: $8,600-$10,584 Trade-In or $11,181 Private Sale (Very Good Condition)

Estimated Value of Cars Divided by Cost to Insure (used the highest value of each car)

Grand Prix Full Coverage: $2,363/$1,100 = 2.15 years
Grand Prix Liability Only: $2,363/$533 = 4.43 years
Toyota Venza Full Coverage: $11,181/993 = 11.2 years

All three data points above are used to help make the decision on which car insurance to take out. With the Grand Prix, the value of the car is so low, that after two years of insuring using full coverage, the cost to insure would be more than the value of the car. So, I decided to insure the Grand Prix using Liability only, because it takes almost 4 and a half years of insuring the vehicle to equal the value of the car. Since, liability insurance is required, let's do one more calculation based on the amount saved by taking Liability only instead of full coverage.

Difference (Full - Liability Only): $1,100 - $533 = $567 saved each year
Estimated Value/Savings = $2,363/$567 = 4.17 years

Since I made the decision to take out liability only on the Grand Prix, I am self-insuring my car in the case of a wreck. Prior to making this decision, I had the money to replace my car in the bank. Since I had the money available, there was no stress in getting rid of full coverage. Although as with all things financial, I like to make calculations to see how many years of liability only insurance it would take to save enough to replace the car using the savings. The calculation above shows that it would take 4 years and about 2 months to save up for a replacement car. I made this decision three years and two months ago. Therefore, I am only one year away from the savings on car insurance being able to replace my car, whenever an accident may occur.

Next, the Toyota Venza was an easy decision because, it will take a little more than 11 years of insuring the vehicle to even reach the value of the car. Also, assuming that liability only for the Venza would be almost the same as the cost to insure the Grand Prix, it would take around 22 years to save difference between full coverage and liability only. Therefore, it makes the most sense to insure the Toyota Venza with full coverage. Plus, this car is still valued in the $10,000-$11,000 range. That's a lot of money to self insure through.

I went through a lot of calculations above and there are pros and cons to both types of coverage. The best advice I can give is to get full coverage, if you don't have the money in the bank to self-insure through an accident. My wife and I are lucky enough to have the $2,363 value of our Grand Prix sitting in the bank. Therefore, whenever that dreaded accident does happen, we can self insure and repair the car using our own money or just replace the car. I would lean on the side of replacing the car, because repair costs may be more than the value of the car.

What's your take on car insurance? Anybody out there feel like it is worth it to put liability only on a car valued at around $10,000? Message me or comment below. I am interested to hear your opinions.