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What Is Collision Insurance and When Is It Worth It?
When it comes to paying for damage to your own vehicle, your first line of defense to recover from car accidents is collision coverage. Many drivers are convinced they’ll never wreck their own vehicle, or that they’ll never be involved in an accident. Unfortunately, the Insurance Information Institute reports that the frequency of collision-related insurance claims grew more than 7 percent in recent years. The extra collision insurance protection could prove well worth the investment.
What does collision insurance cover?
Collision coverage pays for damage you cause to your own vehicle and you can also use it for accidents in which you were not at fault. Really, there are five different ways collision coverage can work to your benefit if you find yourself at the wheel after an accident:
Collision coverage pays for damage to your vehicle when you cause an accident.
- If you wreck your own vehicle, your insurer will pay for the cost to repair the vehicle, or if the cost to repair is more than the value of the vehicle, they will pay to replace it based on its market value at the time of the accident. Collision insurance applies if you hit another vehicle, collide with an object, like a tree or guard rail, or are in a roll over accident.
Collision coverage pays for damage to your vehicle when another driver causes an accident.
- If another driver damages or totals your car, your collision coverage kicks in. Collision coverage is used when the other driver does not have enough insurance to cover the damages to your vehicle.
- Your insurer will pay your damages and then go seek reimbursement from the other driver’s insurance.
- Many drivers take advantage of this option when the at-fault driver’s insurer is being difficult or slow to act. You will typically have to demand your insurer take action in this scenario, but if you paid for collision coverage, you have these benefits.
- Using this option should not raise your rates, since you were not at fault. Be sure to ask your insurance adjuster whether a scenario will or won’t affect your car insurance rates before choosing your course of action.
Collision coverage pays for damage to your vehicle if it rolls over.
- If you’re in a car accident and the force of the impact causes your vehicle to roll over, collision insurance will pay for damages caused in the crash. If another driver is at fault for the accident, and they have sufficient coverage, his or her insurance will likely cover the damages. However, if you cause the rollover, your collision coverage will cover the damages.
Collision coverage pays for damage to your vehicle from hitting an object.
- If you hit a fixed object while driving, such as a tree, guard rail, pole, pothole or mailbox, collision coverage will pay for the damages to your vehicle. Most insurance companies consider objects in the road or on the street to be avoidable accidents, which makes it an at-fault accident. If you hit a fixed object and need to file a claim to cover the damages, expect your car insurance premium to increase, unless you have accident forgiveness.
Collision coverage pays for damage to your vehicle in circumstances not covered by other sections of your policy.
- If you do not purchase comprehensive coverage for vandalism, acts of nature, theft, etc., then you can typically claim such losses under collision coverage.
- For hit-and-run accidents or damage caused by a driver with no insurance, you can typically claim such losses under collision coverage.
- Using collision coverage in these scenarios may raise your rates, as your insurer may assess such damage as if you were at fault or caused it yourself. This is why it’s best to carry comprehensive (COMP) and underinsured motorist (UIM) to pay for damage in any scenario.
How does collision insurance work?
Like all types of insurance, collision coverage has a deductible, or the amount of money you need to pay out-of-pocket before your insurance will pay for a claim. Drivers can choose their collision deductible to meet their needs and budget, but they typically are offered for $0, $500 or $1,000.
Keep in mind that the lower your deductible is, the more you’ll pay for a monthly premium. If you choose a higher deductible, your monthly rate will drop. However, if you choose a deductible of $1,000, for example, and your car is damaged in an accident, you’ll have to pay $1,000 up front towards the cost of repairs.
On top of your deductible, your collision coverage also has a limit, which is the highest amount your insurance provider will pay towards a claim. Most collision coverage limits are the full cash value of your car, minus depreciation.
Here’s an example of how collision coverage works. Say you’re driving during a snowstorm and spin out on the road, which causes your vehicle to roll over. You have collision coverage with a $500 deductible. You’ll file a claim, and the insurance provider will give you a check for the cost of damages to the vehicle, minus $500.
Even though having collision coverage can be a life saver in certain situations, it’s important to make sure you can comfortably pay your deductible if anything were to happen to your car.
How does collision insurance affect my monthly premium?
Adding collision insurance coverage to your auto policy will increase the cost of your monthly premium, however the amount of increase will vary greatly from driver to driver, depending on several factors. According to the Insurance Information Institute, certain factors affect the cost of a driver’s insurance premiums. Such factors include level of education, income, age, gender, credit score, driving habits, driving history, geographical location, and the vehicle you drive. Gathering quotes from multiple car insurance companies is the best way to know what your premiums will cost and where you might get the best deal; just make sure you’re comparing equal coverage and policy limits when getting quotes from different insurers.
Most insurers will offer slight discounts to drivers who buy multiple forms of coverage at once, such as comprehensive, underinsured motorist, rental, and personal injury protection on their auto policy. Additional discounts may be offered for those who buy homeowners, motorcycle, boat, RV, or other forms of insurance coverage from the same insurer. Generally speaking, these can be qualified as “spend more to save more” discounts; drivers on a budget shouldn’t consider buying extra coverage as a means to save money. On the other hand, going without insurance coverage (specifically collision) will likely leave you with a large out of pocket expense in the event you wreck your vehicle.
Beyond the aforementioned benefits of collision coverage, there are a handful of very important factors to keep in mind when considering when to drop collision insurance coverage, or when collision insurance is worth it for your car.
Factors to consider when choosing whether or not to pay for collision coverage
Your vehicle’s value
If you drive a vehicle that’s only worth a few thousand dollars or less, it might make sense to pay for any accident damage out-of-pocket. For more expensive vehicles valued over $10,000, it’s a good idea to pay for collision coverage. If you have a loan on your vehicle, the lender will likely require you to have collision coverage on your auto policy. The same goes for leased vehicles. If you have a car loan and don’t have collision insurance, and your car is damaged or totaled, you’ll have to pay the full value of the loan with no way to recoup the money or the vehicle.
Depreciation in value of your vehicle over time
If your vehicle is worth roughly $10,000 today, you can expect that in five years it might be worth anywhere from $7,000 to $3,000, or even less. You might consider dropping collision coverage in a few years if you can expect your vehicle won’t be worth more than a few thousand down the line.
Your risk of an accident
If you drive your vehicle infrequently or drive less than a few thousand miles per year, your risk of an accident is relatively low compared to those who drive more frequently. If you drive everyday, and if you drive and park in urban areas, you may be at higher risk of an accident. Also, be honest about your driving record. If you have a history of accidents, it’s probably a good idea to protect yourself with collision coverage.
You can do some basic math as to whether collision coverage is financially viable by following these steps:
- Research your vehicle’s current value by searching for comparable models on craigslist, ebay motors, autotrader.com, kbb.com, nada.com, or other websites for shopping for vehicles.
- Calculate your current rates for collision coverage or get quotes for collision coverage to know what your expected yearly premium will be based on your chosen deductible.
- Do the math. Subtract your collision deductible from your car’s value. If you can afford to pay this much out-of-pocket, collision coverage isn’t essential. If that number is too high for your budget, you should get collision coverage.
- To determine the amount of money you would get if your car was totaled, take the number from above and subtract the cost of your collision insurance for the duration of the policy.
If, over the course of three to five years, the total of your yearly premiums will equal or exceed your vehicle’s value, you should consider cancelling your collision coverage. Instead of paying your insurer on a monthly basis for collision coverage, you should instead set aside a similar amount for an emergency vehicle fund, which you can use for emergency repairs or for maintenance.