Tuesday, November 25, 2008

Are the Fuel Savings on Smaller Cars Worth the Increased Cost of Insurance?

M.P. McQueen in a WSJ article, Higher Insurance Costs Erode Fuel Savings on Small Cars states that smaller cars cost more to insure and suggests that fuel economy savings may be offset by higher insurance costs.

A 40-year-old male driver would pay an average of $1,704 to insure a 2009 Mini Cooper that gets 37 miles per gallon on the highway, according to a study by Insure.com, an online insurance broker. That same driver would pay only $1,266 -- a difference of $438 -- to insure a Toyota Sienna Minivan, which gets 23 mpg.

Given this information we can calculate break even mileage at a range of gasoline prices. For example, at $4.00 a gallon the gas cost per mile for the Mini Cooper is 10.8 cents and 17.4 cents for the Toyota. That's a savings of about 6.6 cents per mile. Dividing $438 by 6.6 indicates that you would break even at 6,656 miles. If you drove more than this, the gas savings on the Mini Cooper would exceed the additional cost of insurance. Of course, this considers only the gas savings. If you factor in the purchase price of the car, break even mileage will differ. The table below provides break even mileage at alternative gasoline prices. At the current price of about $1.75 per gallon you would have to drive 15,214 miles before breaking even.

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