Collision insurance is a type of coverage that helps pay to repair or replace your car if you’re involved in an accident. State laws do not require collision insurance coverage, though auto loan and leasing companies typically do. Drivers with valuable cars should also consider purchasing collision car insurance even when it’s not required in order to protect their finances in the event of an accident.
A variety of factors influence the cost of collision coverage and whether a driver should purchase it, from their financial situation and the value of their car to their driving record and where they live. Drivers must weigh the cost and benefits to determine whether collision insurance is a good value.
What Does Collision Insurance Cover?
- Collisions with other vehicles
- Collisions with objects, such as fences or trees
- Single-car accidents that involve rolling or falling over
- Damage caused by hitting an obstruction in the road, such as a pothole
What Is Not Covered by Collision Insurance?
- Damage to your vehicle not related to driving, such as damage from hail or theft
- Damage to another person’s vehicle
- Medical bills (yours or another person’s)
If your car is not fully paid off, your lender or leaseholder will likely require you to obtain collision insurance. If you fail to purchase at least the minimum collision insurance required by your lender or leaseholder, they will purchase it for you.
This is called “force-placed” insurance, and the cost will be rolled into your loan or lease. The premiums on this type of insurance can cost up to five times more than if you had purchased collision coverage through your own insurer. Moreover, the coverage is usually more limited as well. For example, many force-placed plans don’t include liability insurance coverage. Because liability insurance is typically required by your state, your license could be suspended if you only had this type of force-placed plan.
Therefore, it pays—in more ways than one—to buy your own collision insurance policy if required to do so. And don’t let that coverage lapse during the lifetime of your loan. If so, your lender may then purchase a force-placed plan on your behalf until you buy your own collision insurance.
How to Decide About Collision Insurance If Your Car Is Paid Off
If your car is paid off, calculate how it is worth. Several online tools, such as N.A.D.A. online guides or the Kelley Blue Book, can provide the most up-to-date information, but Craigslist, eBay Motors, and Auto Trader can also give you a sense of how much other owners think their cars are worth. Once you have an idea of your car’s value, consider the following scenarios to decide if you should buy collision coverage.
Scenario 1: You Cannot Afford To Replace Your Car
Quick Answer: Buy collision coverage.
Imagine you are just about to pull into your driveway, when the neighbor’s dog darts in front of your car. You panic, swerve, and accidentally hit a telephone pole, totaling your car. Could you afford to replace it? If not, you should consider collision coverage. Buying even a basic policy could end up protecting your car and finances.
Scenario 2: You Can Afford To Replace Your Car
Quick Answer: It depends.
If your “emergency” fund contains more than enough money to replace your car, you could skip collision coverage. But before you decide, ask yourself the following three questions:
- How much will I save by dropping collision insurance?
The WalletHub comparison tool can calculate the average price you’d pay for collision coverage. To a large extent, the cost is based 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.
- How much money am I risking?
At most, you are potentially risking the cost of replacing your car if it were destroyed. Consider not only the financial cost of this worst-case scenario, but also the personal costs: 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.
- How likely is it that I will have to pay to replace or repair my car?
To answer that question, first consider your driving record. 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.
Next, 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 being otherwise 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 Oakley, 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 the 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 fund has $30,000, he should answer the three questions listed above.
The quote generator reveals that 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 southern California, 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.
How Much Does Collision Insurance Cost?
The cost of collision coverage is added on top of the cost of liability coverage. The three major factors affecting the price of collision insurance are your driving history, the value of your vehicle, and the size of your deductible. High-risk drivers who have had several accidents in the past will pay far more for collision coverage than drivers who have a spotless driving record. A driver’s gender, location, education, profession, and marital status will also affect the cost of insurance.
Finally, the size of the deductible will also affect the price of collision coverage. A deductible is the amount of money you will pay for car repairs before your insurance coverage is applied, and it typically ranges from $100 to $1,000. If repairs cost more than the deductible, your insurance will pay the difference, up to the policy’s limit.
Collision policies will typically pay up to the value of your vehicle just before the damage occurred (that is, purchase price less depreciation), minus your deductible.
Collision Insurance Monthly Premium
* Premium figures assume comprehensive coverage with $1,000 deductible, bodily injury liability policy with a limit of $50,000 per injured person and a maximum payout of $100,000 per accident, as well as a property damage liability limit of $50,000.
As shown in the chart above, the smaller the deductible, the less you will pay out of pocket to repair a damaged car. However, a smaller deductible will also mean that your monthly premiums will be larger, as will your insurance company’s maximum payout. The opposite would be true if you chose the large deductible.
If a driver wishes to purchase collision coverage, many insurance companies will require the driver to purchase comprehensive coverage as well. But the opposite is not true: many insurance providers will allow a driver to purchase only comprehensive coverage and drop collision coverage. But remember, insurance packages vary across providers. An insurance agent can provide you with more specific details and cost information.
Unless you have had many accidents in the past, collision coverage may be a relatively inexpensive way to obtain broad protection of your car and finances. And, unless you are financing the purchase of, or leasing, a car, it is optional.
A general guideline to follow is that if three to five years’ worth of collision coverage premiums would exceed the value of your car, dropping collision coverage might be a smart move, as long as you have savings that you don’t mind using to repair or replace your vehicle. You can put this money toward more productive uses instead.
Take the time to compare collision car insurance quotes and evaluate how much it would cost to fix or replace your car in order to decide whether—and how much—collision insurance to buy.