There are several decisions you need to make when purchasing auto insurance, one of which is whether or not to purchase collision insurance. This is usually required if you lease or pay off your car, but once that’s done you’ll need to decide whether to keep it or drop the coverage.
Collision insurance coverage usually helps you recover damage to your vehicle if you’re involved in a car accident, but it’s not always worth it. If your car isn’t worth much in relation to the amount you pay for coverage, it may be cheaper to skip it altogether.
Learn more about how collision insurance works and if it’s right for you.
See how much you can save on your car insurance
What is Collision Insurance?
Collision insurance is a type of car insurance policy that helps cover the cost of repairing your car after an accident, whether you were responsible for it or not. It covers damage caused by a collision with another vehicle or even a stationary object, such as hitting a tree or lamppost.
It is usually purchased alongside liability insurance, which covers property damage and medical bills for other parties if you default in an accident.
Oddly enough, collision insurance does not cover damage caused by hitting deer or other wildlife. This is covered by comprehensive insurance, another type of coverage that covers incidents such as theft, vandalism, fire, weather and animal accidents.
If you lease your car or pay off a car loan for it, you probably don’t have much of a choice when it comes to paying for collision coverage. Most lenders will require you to purchase collision and comprehensive coverage in addition to liability coverage because they still have an ownership interest in the car.
After paying for this and receiving the car free and clear, you can choose whether or not to keep collision insurance.
Depending on your state, you may also need to purchase uninsured motorist coverage.
How does collision insurance work
As with most types of insurance, collision insurance usually has a deductible. This is the amount you must pay before your cover starts. After that, your insurer will cover the actual cash value of your car plus any additional damages up to the limits of your policy.
For example, if you have a $500 deductible and you spend $2,000 repairing your car after backing up on an icy road, your insurer will reimburse you $1,500. If you are not at fault, your insurer can cover the damage without you paying the deductible. Or it can send you a check if you paid a deductible.
A higher deductible results in lower insurance costs but higher out-of-pocket costs.
How much is collision insurance?
According to the Insurance Information Institute, the cost of collision insurance averages $290 per year. It is usually available as an a la carte option with the must-have auto insurance policy in every state.
The actual cost of collision coverage depends on several factors:
Where do you live
How old are you
your credit score
your driving record
The age, make and model of your car
how high deductible you choose
For example, the cost of collision insurance may be lower for an older car than for a new one. In addition, insurance policy premiums vary greatly between insurers. That’s why it’s always a good idea to look for the best auto insurance rates every time your current policy is due for renewal, as you can save a ton of money if another insurer offers better rates.
Is Collision Insurance Worth It?
The truth is, collision insurance isn’t always worth the cost. You may have heard that it’s not worth taking in older vehicles, and that may be true, but not always. Instead, it depends on the math, the value of your vehicle and your personal comfort level. This way you can check for yourself whether it is time to give up the collision insurance.
Step 1: How much will collision insurance cost you?
We start with a cost-benefit analysis. To calculate how much that will cost you, you need to add two numbers together: your annual premium and your deductible.
For example, if your annual collision coverage premium is $290 per year and your collision deductible is $1,000, your insurance cost, should you ever have to make a claim, would be $1,290.
Step 2: How Much Do You Get When You File a Collision Insurance Claim?
Then we calculate your potential benefits. To do this, you need to subtract your deductible amount from the current actual cash value of your car.
This is not what you essentially paid for your car; How much is your car currently worth when you sell it? It’s a good idea to check your car’s value with a few sources, such as Kelley Blue Book and Edmunds, to get a good idea of its value.
For example, if your car’s actual cash value is $5,000 and your collision deductible is $1,000, the maximum worst-case payment you would receive, as a total loss, would be about $4,000. This is the “benefit” part of the cost-benefit analysis.
Step 3: Compare the insurance costs with the potential benefits
To see if the math works, compare the insurance cost you calculated in Step 1 with the insurance benefit you calculated in Step 2:
if the costs exceed the benefits: Collision insurance is not worth it. You have to pay more for the insurance if you have to make a claim.
when costs are less than profitsCollision insurance can be worth it. In the worst case, you will receive a higher cash payment than you paid in the system.
Continuing our example, you would pay $1,290 for collision insurance and get back $4,000 if you had to make the maximum allowable auto repair claim. In this case, it’s probably worth getting insurance, as you’re likely to get back more than you paid for.
Step 4: Consider your comfort level and savings account
It’s good to know the numbers behind big financial decisions, but it’s also important to consider how much savings you have and even how you feel.
For example, if the cost of your collision insurance is $2,000 and your maximum benefit is $2,100, you’re really only saving yourself $100. And even then, that’s only if you make the highest possible claim.
In that case, is it really worth paying $2,000 for collision insurance if you can save $100? How about $500? $1,000? $5,000? The answer depends on your personal comfort level and how much you have in your emergency fund to pay for auto repairs not covered by insurance.
How to save on collision insurance
There are several things you can do to lower your car insurance premium. Here are a few ideas:
drive safely. The more things you have on your driving record, the higher the cost of your insurance. Drive safely and you will be rewarded in more ways than one.
shop. Different car insurance companies charge different rates for each type of car insurance. Get rate quotes from as many companies as possible, or find an insurance broker to shop for you.
Look for discounts. Most auto insurance companies offer many discounts that can save you money. Ask about these discounts when you receive a car insurance quote.
Increase your deductible. The higher your deductible, the lower your premium – but remember it will still affect your overall insurance cost if you have to make a claim. Most financial experts recommend choosing the highest deductible you can afford to pay out of pocket.
Work on your credit score. Auto insurance rates are often tied to your credit score. Working to boost your credit score will also save you money on insurance and other financing costs.
Re-evaluate your insurance needs at each renewal. You may be paying for collision insurance today, but the calculation could change the next time you go to pay your bill. Just like when looking for new insurers, each time you renew, you should check that your current coverage is still valid.
Questions to ask
Is hull or collision insurance better?
One is not necessarily better than the other. They are both useful in different cases. Collision insurance helps protect your car from damage caused by an accident other than hitting deer and other animals. Comprehensive insurance helps protect your car from non-accident damage, such as falling trees, weather conditions, and collisions with wildlife.
What is an excess?
A deductible is the amount you must pay out of pocket before your insurance takes effect. For example, if you have a $500 deductible and you end up in a fender bender that costs $1,500 to fix, you pay first. $500 and your insurance will pay the remaining $1,000.
Is it bad not to have collision insurance?
Not necessary. If you have a paid-off car and the amount you would receive from a claim is less than what you would have paid for collision insurance initially, it’s not worth it.
Collision insurance is not always required, but about 80% of drivers have it along with comprehensive insurance. If you’re concerned about the cost of repairing your vehicle if you’re accidentally involved in an accident, it may be worth taking it with you. And if your car is financed, you need it. It all depends on the market value of your vehicle and your personal preferences.
Regardless of the type of coverage you’re looking for, make sure you get several auto insurance quotes so you can find the best coverage. Our list of the best car insurance companies is a good place to start.
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This article Is collision insurance worth it? Originally published on FinanceBuzz.