Do I need collision insurance if my car is paid off?

You need collision insurance after your car is paid off if you can’t afford to repair or replace your car out of pocket in the event of an accident. In general, you’re probably safe to drop collision coverage if 3 to 5 years of collision premiums would cost more than the value of the car. Collision insurance pays to repair or replace your car after a crash regardless of who was at fault.

How to Decide If You Need Collision Coverage on a Paid-Off Car

1. Determine your car’s worth.

Several online tools, such as N.A.D.A. online guides or Kelley Blue Book, can provide the most up-to-date information. Craigslist, eBay Motors, and Auto Trader can also give you a sense of how much other owners think their cars are worth.

2. Check if you could afford to replace your car.

If you can’t afford to replace your car, you should probably have collision insurance. Buying even a basic policy could end up protecting your car and finances.

3. See how much you would actually save by dropping collision insurance.

The cost of collision insurance is based largely on your driving history, the value of your vehicle, and the size of your deductible. You will most likely only save a few hundred dollars per year by not purchasing collision insurance.

However, if you have been in several accidents in the past, your insurance rates will probably be higher than average. Therefore, by dropping collision insurance and not paying those larger bills, you could potentially save much more.

4. Think about how much money you would risk without collision insurance, even if you could afford to replace your car.

In addition to the cost of replacing your car if it’s totaled, consider the personal costs. For example, there’s the disruption to your daily life and the stress caused by having to take money from—and potentially wipe out—a retirement, “rainy day,” or college fund.

5. Consider how likely is it that you will have to pay to repair or replace your car.

Although past performance is no guarantee of what will happen in the future, a history of auto accidents might indicate that you are at an increased risk.

Even if you are a careful driver with an accident-free record, consider the benefits of buying collision coverage in case another driver hits your car. In this scenario, collision coverage can quickly pay for repairs or replacement. This is particularly beneficial if the other driver’s insurance company is contesting who was at fault or otherwise being difficult. Your insurance company will take over your claim and all the headaches that fight entails. It can also cover you if it turns out that the other driver is at fault but does not have adequate insurance. Such claims should not raise your insurance rates.

Example: Collision Car Insurance Decision Process

To help review the above decision process, let’s use a specific example. Picture a 36-year-old single male who lives in Oakland, California. Let’s call him Mark. He drives a 2008 Honda Accord LX Sedan in good condition with only the standard options and 100,000 miles on the odometer. According to Kelly Blue Book, Mark’s car is worth about $7,500.

If Mark only has a few thousand dollars in savings, he should probably buy collision coverage. But if his emergency fund has $30,000, he should figure out how much dropping collision insurance would save him, how much he’d be risking by dropping it, and how likely he is to have to an accident.

Mark will have to pay about $480-$600 per year for collision coverage. That is, Mark will save 6-8% of the value of his car by not buying collision insurance. However, he is risking a quarter of his rainy-day fund if he has to replace his car.

Considering the high traffic in the Bay Area, Mark may decide that it’s only a matter of time before he is in an accident. Due to the substantial risks to his finances, he may conclude that collision coverage is a wise investment.

To learn more, check out WalletHub’s guide to collision insurance.